In July 2021 Manu wanted to buy a new car costing $60,000 and trade-in his old car. The car dealer agreed to pay $18,000 for Manu’s old car, but this would leave a residual balance of $7,000 owing to the lender. Manu would need to refinance the residual debt with the loan for the new car. Including the $7,000 refinanced debt, insurance, and fees, Manu’s debt would be just over $70,000.
On the lender’s assessment of the information provided by the dealer the loan was affordable.
About five months later Manu had separated from his partner and was experiencing financial difficulty so went to a financial mentor for help. The financial mentor calculated that Manu could only afford payments of $200 a week and the lender agreed to reduce Manu’s payments from $385 to $200 for six months on the grounds of unforeseen financial hardship.
However, when the financial mentor took a closer look at Manu’s financial situation, she could not understand how a lender could have loaned $70,000 to someone who was earning $23 an hour. The lending seemed unaffordable, so the financial mentor asked the lender for their affordability assessment.
The lender provided the affordability assessment saying they were comfortable with their decision to lend.
The financial mentor disagreed, and on Manu’s behalf, complained to FSCL.
The lender based their decision to lend on the online form completed by the car dealer showing that Manu was single, with no dependents, paying $50 a week in board. The lender maintained their view that, on the information presented by Manu, the loan was affordable.
The financial mentor noted that Manu withdrew most of his income in cash and said that if the lender had asked more questions about Manu’s cash withdrawals, they would have discovered that Manu was in a relationship, with a dependent child, and was making substantial cash contributions towards the family’s expenses meaning that the loan was unaffordable.
Manu’s loan balance also included $3,441 for mechanical breakdown insurance and a restart waiver. The financial mentor said these insurances were not explained to Manu and were automatically added to the loan balance without considering whether they were appropriate for his needs.
With respect to the add-on insurance, the lender said that their dealerships are trained in the Credit Contracts and Consumer Finance Act 2003 (CCCFA) obligations to explain the insurance and make it clear the products are optional.
It was our view the lender had over-estimated Manu’s income, by including overtime pay, and under-estimated Manu’s expenses and had had not satisfied themselves that Manu could repay the loan without suffering substantial hardship.
Because Manu withdrew his income in cash to contribute to the family’s living costs, we thought it right to base Manu’s financial situation on the Statistics New Zealand data and to divide the expenses in half to acknowledge Manu’s partner’s likely contribution. This rough estimate left Manu with a weekly budget surplus of $450 but, after deducting the new loan repayment amount of $385, Manu’s budget surplus reduced to $65 a week.
We did not know how much the family was paying in rent, because the tenancy agreement had been in Manu’s partner’s name and, as they had separated, it was not possible to get this information. However, it seemed to us that even if Manu contributed his budget surplus of $65 and the $50 referred to in the affordability assessment, $115 was an unrealistically low contribution towards the family’s rent commitment.
It was also our view that the lender had not met their CCCFA responsible lending obligations when selling the insurance. The Responsible Lending Code gives lenders guidance about how to comply with the CCCFA yet there was no record showing:
- how the insurance met Manu’s requirements and objectives
- the insurance was affordable
- that the lender had helped Manu make an informed decision.
In our view the remedies in the CCCFA applied and we said that the lender should:
- refund the interest and fees on the loan and allow Manu to repay the loan at $200 a week, under section 89(1)(aaa)
- refund the cost of the insurance, under section 89(1)(aac).
The lender then offered to refund to Manu all the payments he had made if he was prepared to return the car. Manu asked how much the refund would be. The lender said the refund was $18,000 and clarified that the offer was conditional on the dealer being prepared to take back the car. The lender said that provided the car was in the same condition as when Manu bought it the dealer should be able to take the car back and asked Manu to supply photographs as proof.
Manu cleaned the car and took time off work so that his financial mentor could photograph the car.
Although the car looked to be in good condition the dealer declined to take the car back and the lender withdrew the offer.
While Manu was working on the car, the hardship period agreed to by the lender ended and the payments reverted to $385 instead of $200 a week. Manu, who does not have internet banking, did not know why he suddenly did not have any money in his bank account. Manu took time off work to visit the bank to find out what had happened. When Manu discovered the lender had increased his payments, Manu needed to take more time off work to visit his financial mentor.
The financial mentor contacted us, and the lender agreed to enter into a further loan variation agreement. Manu needed to make a further appointment with his financial mentor to sign the documents.
While it was pleasing to see the lender making a generous offer to return Manu to the position he would have been in if the loan had not been advanced, it was disappointing to see the offer withdrawn. Manu had gone to some effort to have the car photographed. We were also concerned about the inconvenience associated with the loan repayments reverting to $385 without any discussion with Manu, the financial mentor, or us.
It was our final decision that the lender was obliged to:
- refund the interest and fees charged on Manu’s loan
- allow Manu to repay the loan at $200 a week
- waive all future interest and fees
- refund the cost of the insurance
reducing Manu’s loan balance to $46,000.
We also decided that the lender should pay Manu $1,000 as compensation for the disappointment and inconvenience associated with the withdrawn settlement offer and increasing the loan repayments without warning.
Manu accepted our decision, and the complaint was resolved on this basis.
Insights for participants
If a customer is not digitally literate it can take a lot of extra time to do things that many people take for granted. In this case, Manu needed to take a lot of time away from work to his employer’s annoyance, to visit his financial mentor so that she could help him email photographs and documents through to the lender. We encourage participants to make their processes as smooth as possible to avoid unnecessary inconvenience for the borrower.