Loan affordability assessment

When Lauren applied for a loan, she said that she needed $5,000 but wanted a $10,000 loan in case she needed more money later. Lauren did not say what she needed the money for. On the application form Lauren described herself as a business owner, but her only source of income was a Work and Income benefit.

To support the application, Lauren provided bank statements, utilities bills, records of earnings from her Airbnb property that she owned, confirmation of insurance, and proof of identity.

The lender approved a loan of $13,600, $10,000 was paid to Lauren and $3,600 was paid to clear existing debt. The loan was secured by Lauren’s vehicle.

A month later Lauren applied for a loan top-up of $4,000 to cover the cost of repairing a horse float and removal costs. Lauren was moving from her rental accommodation to live in the property that had previously been her Airbnb rental.

Lauren made all the loan repayments for four months, but then the payments started to be dishonoured. Over the following year Lauren made sporadic payments and a year after the loan top-up was advanced, the lender agreed to restructure Lauren’s loan, reducing the weekly payments by about $25.

Again, Lauren made the payments for about four months, before falling into arrears. The lender issued a repossession notice, but Lauren hid the vehicle. When the lender said they intended taking legal action to recover the debt owed, Lauren contacted a financial mentor for help.

The financial mentor could not understand how the lender could have approved the loan. The financial mentor calculated that Lauren’s budget was $60 in deficit when the loan was approved and asked the lender how they calculated that the lending was affordable.

When the lender was unable to give the financial mentor their affordability calculation, the financial mentor complained to FSCL.

Dispute

Lauren’s financial mentor said that the lender had not satisfied their responsible lending obligations by lending to Lauren when her budget was $60 a week in deficit. The lending was clearly unaffordable and had caused Lauren significant financial hardship.

The lender responded that they had made reasonable inquiries into Lauren’s financial situation and were satisfied that she could afford to repay the loan without suffering substantial financial hardship. The lender showed us their calculation of Lauren’s budget, which left her a weekly surplus of $134.45, allowing her to make the loan repayments of $112.80.

The lender had allowed for the following monthly expenses:

  • $150 for Lauren’s dependent child
  • $433 for Lauren’s mortgage payment
  • $250 to service existing debt
  • $900 for Lauren’s living costs.

Although expressed separately, $150 for Lauren’s child and $900 for Lauren, the lender had allowed a total of $1,050 for all Lauren’s monthly living costs. The lender explained this amount was based on household survey economic data and included expenses for food, clothing, utilities, health, and transport but could not say how much of the $1,050 was attributed to any particular expense.

The lender said they had not included Lauren’s Airbnb income because it can be unreliable.

Although Lauren had defaulted within a couple of months of drawing down the loan the lender did not accept there was any connection between defaulted payments and irresponsible lending.

Review

Under section 9C of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) a lender is obliged to make reasonable inquiries, before lending to be satisfied that:

  • the lending would meet Lauren’s needs and objectives and
  • that Lauren would be able to repay the loan without suffering substantial hardship.

We were concerned that the lender had loaned Lauren $17,600 with little information about the purpose of the loan. We noted that lending more than a borrower needs for their purpose can be a red flag that the lending is not responsible.

We agree that statistically derived information is a valid way of assessing affordability, but the lender was unable to give us any information to allow us to check that the $262.50 a week for all living costs, excluding mortgage and debt repayments, for an adult and one child was reasonable.

When we looked at the Inland Revenue Department Household Expenditure Guide, prepared with information from Statistics New Zealand, we saw that a parent with one dependent child will spend a total of $885.40 each week on living costs. Although some items would not apply to Lauren, taking the most basic items from the list, being food and transport, Lauren’s weekly living expenses quickly exceeded the $262.50 allowed in the lender’s calculation.

In addition, the lender knew that Lauren owned a property, which came with additional costs for rates and insurance.

It was our view that the lender had not met their responsible lending obligations and that the remedy at section 89(1)(aaa) of the CCCFA applied. This meant that the lender was obliged to refund the interest and fees charged to Lauren of $11,000, bringing her debt down to $8,000.

Although the lender still maintained that they had met their responsible lending obligations, both Lauren and the lender accepted our decision.

Insights for participants

Under the 2017 Responsible Lending Code guidance, the lender is entitled to rely on statistical information to calculate loan affordability. However, the dispute resolution scheme must be able to assess this statistical information to be satisfied that the lending was affordable. If the lender is going to include a lump sum for living costs, they must be able to show a breakdown of those living costs, how they calculated the allowed amount and demonstrate that the amount is reasonable against reliable, verifiable, data.