In mid-2017, Grant wanted to trade-in his car for a cheaper model, because he had been out of work for three months earlier that year. Grant met with a broker who helped him apply to a lender to fund the balance of the purchase price of the new vehicle (after deducting the trade-in amount). Grant’s balance on the new loan was $17,600, with weekly loan payments of $91.30.
Grant’s loan application included a number of expenses from Grant and his partner Annika’s weekly budget, including rent, fines, and payments towards other loans and credit, totalling just over $1,000.
Soon after he took out the new loan, Grant fell behind on his payments. In March 2019, Grant sought advice from a financial mentor. In the mentor’s view Grant’s mid-2017 loan was never affordable, which the lender disputed. As a result, the mentor complained to FSCL, on Grant’s behalf, about the lender.
The lender said that the broker had completed the mid-2017 loan application form, after reviewing evidence of Grant and Annika’s income and expenses. The broker then entered this information in the lender’s computer system, and a lending ‘score’ was generated. The lender relied on the score when it decided to lend.
The lender said it was not necessary to obtain copies of Grant and Annika’s bank statements, and quoted section 9C(7) of the Credit Contracts and Consumer Finance Act which says lenders can rely on information provided by borrowers.
The lender also said that Grant could service the loan because he was generally able to make his instalment payments, and he quickly remedied any missed payments. In the lender’s view, it was unexpected circumstances (his father’s death) that caused Grant to fall into arrears, which was unforeseeable at the time the loan was taken out in mid-2017.
The financial mentor said that while the broker had obtained bank statements from Grant and Annika, the information from the statements was not accurately reflected in the weekly expenses on the loan application form.
In addition, the mentor said that Grant’s very first loan payment was dishonoured, and there were five further dishonours in the following six months which indicated an affordability issue. The mentor claimed the death of Grant’s father did not affect his ability to repay the loan, it was the pre-existing affordability issue that was the problem. The fact that Grant was wanting to downgrade his vehicle due to financial difficulties was another indication he would struggle to repay a loan.
We analysed the bank statements and other information about Grant and Annika’s income and expenses, as at mid-2017. On average, Grant and Annika’s net weekly income was $1,730. This meant it appeared there was a surplus of $692 to pay the $91.30 weekly payment on the new loan.
However, it was unreasonable for the lender to accept that Grant and Annika’s only weekly living expense was a rent payment. There was no record of any other expenses, such as food, general living, utility, or transport costs. More concerningly, there were additional weekly payments to lenders totalling $130, and Grant and Annika’s credit card payments were $50 more than had been noted on the application.
From our review, Grant and Annika’s weekly expenses (excluding food, but including the new loan payment of $91.30) were closer to $1,500. If food costs and other general living expenses (such as general medical expenses) were then added into Grant and Annika’s budget, it was questionable whether they could afford the new loan.
No overall consideration of Grant and Annika’s situation
Moreover, our review of Grant and Annika’s weekly expenses was not the end of the matter. We also considered Grant and Annika’s wider financial circumstances.
In the month prior to taking out the loan, Grant had borrowed $1,892 from three pay-day lenders and had repaid a total of $4,600 in debt. Grant and Annika also had two cars before the mid-2017 loan was granted, but the budget did not make allowance for the costs of running them. Grant had been out of work for about three months at the beginning of 2017, which did not appear to have been factored into an assessment of their financial situation. We also agreed that trouble paying the loan so soon after it was taken out was a strong indication that Grant was never able to afford it.
The lender must carry out its own affordability assessment
We said that although the broker filled out the application form with Grant, it was ultimately the lender’s responsibility to ensure it undertook sufficient affordability enquiries. We noted that under the current responsible lending provisions of the Credit Contracts and Consumer Finance Act, a lender can rely on information provided by a borrower in an application form. However, if the lender had viewed the bank statements, Grant’s pattern of taking out small payday loans to make his payments to the lender would have been apparent.
Under section 9C(3)(a)(ii) of the Credit Contracts and Consumer Finance Act, and the responsible lending code, the lender should have conducted reasonable enquiries before entering into the loan to be satisfied that Grant could afford to pay without suffering substantial hardship. In our view the lender could not just rely on the information provided in an application form, without some independent verification. The lender could not have met its responsible lending obligations when the information received from the broker was unverified and inaccurate.
Based on section 94(1)(b) of the Credit Contracts and Consumer Finance Act, we said the lender should write off all the interest and fees charged on the loan. Taking into account the payments Grant had already made towards the loan, this left an amount to pay of $10,100.
Both Grant and the lender agreed with our view. Grant stressed, however, that he wanted to be able to keep the vehicle so he could continue to work.
Unfortunately, it appeared Grant still could not afford to make payments towards the new balance of $10,100. He spoke with his financial mentor, who applied for a summary instalment order. Under the summary instalment order, Grant’s debts to third-party unsecured creditors were reduced. This meant that he only had to pay 25 cents in each dollar originally owed to those creditors. Because of the reduction in the amount that Grant owed the third-party unsecured creditors, Grant had more room in his budget to pay his secured debt to the lender (secured debts not being covered by summary instalment orders).
The parties entered into an agreement acknowledging the new balance of the debt ($10,100). The parties also agreed that ordinary interest would accrue (because Grant was keeping the vehicle), and that Grant would make fortnightly payments of $150. The financial mentor was able to provide a comprehensive statement of Grant and Annika’s financial position, which showed that a $150 fortnightly payment was affordable.
Grant commenced the new payments, and his complaint was resolved.
Insights for participants and consumers
FSCL is investigating an increasing number of complaints where lenders have not conducted a reasonable enquiry into whether a borrower can afford a loan. This includes where the borrower has applied with the assistance of a finance broker. Often, once we have analysed a borrower’s bank statements, it reveals that their weekly living expenses, and existing debt payments, are more than a borrower declared in their loan application.
Lenders need to ensure they have a clear picture of the borrower’s financial position, and investigate any obvious red flags (for example, where the only declared living expense is rental payments).