Alan had a good lending history with a payday lender. From time to time he borrowed a couple of hundred dollars and repaid the money on time, without incident. While Alan was arranging a $200 loan the payday lender happened to mention that it would be prepared to lend him up to $5,000.
Unbeknown to the payday lender, Alan was going through a bad patch in his life. He had recently lost his job and his relationship had come to an end. What should have been apparent to the lender, from the three months’ worth of bank statements, was that Alan was spending a large amount of money, more than $2,500 in any given month, in pokie machines. Not only that, but Alan had two credit cards and loans with six different payday lenders and two longer term lenders.
Alan immediately defaulted on the loan, but the default was just part of Alan’s difficulties and Alan asked his brother for help. Alan’s brother contacted FSCL on Alan’s behalf saying he could not understand how the payday lender had approved such a large loan when it should have been able to see Alan’s gambling problem.
We referred the complaint to the payday lender, but the payday lender said that Alan met its lending criteria and, while the payday lender was prepared to consider a hardship application, it was not prepared to review its decision to lend in the first place.
Alan asked us to investigate his complaint.
Alan considered the lender had not followed a reasonable assessment process to make sure he could repay the debt. Alan acknowledged that while he had good income, and a previous good history, he considered the payday lender had contributed to his situation, lending money too easily without any consideration of the wider lending picture.
When we looked at the information the lender had, we could not see that it had undertaken a robust budget assessment. There was no allowance for food or rent. The lender had used a computer programme to harvest regular expenses from Alan’s bank statements but did not appear to have applied any common sense to that information. It seemed to us obvious that the regular withdrawals of $100 in successive transactions on the same day at bars and pubs were likely gambling money. We were not satisfied the lender had adhered to responsible lending guidelines to ensure that Alan could afford to repay the loan without suffering substantial financial hardship or that the lender had helped Alan make an informed decision before borrowing the money.
When we discussed our concerns with the lender it agreed its procedures could improve. The lender agreed to accept the principle sum of $5,000 to be repaid at an affordable rate, and agreed not to charge Alan any interest or fees provided he did not miss any payments.
Alan accepted the proposal and provided financial information to allow the lender to set the payments at a reasonable level.
Insights for participants
Harvesting information from bank statements using a computer algorithm may not be enough to satisfy your responsible lending obligations. While these tools can be helpful, they do not replace an intelligent, robust assessment of the particular borrower’s circumstances.