Fiona and her husband, Kevin, started experiencing financial difficulties when Kevin became unwell and had to stop working. As a result, Fiona and Kevin fell behind on their mortgage. To pay the mortgage arrears, Fiona applied for a $5,000 loan with a finance company.
The finance company approved the loan and advanced the $5,000. Fiona started repaying the debt, but her financial situation did not improve. About a year later she went to a financial mentor. The financial mentor contacted the lender and explained that Fiona was having difficulty repaying the debt. The lender offered to reduce the payments to give Fiona the opportunity to sell her house or her car to repay the debt.
This was not an option for Fiona because she and Kevin lived in a rural area and needed their car to take Kevin to medical appointments. The financial mentor reviewed Fiona and Kevin’s financial situation and began to wonder how the lender could have approved the loan in the first place.
The lender eventually gave the financial mentor some information supporting their decision to lend, showing Fiona had income of about $800 a fortnight and her only expense was a monthly payment of $60 to Sky TV.
The financial mentor said, in her view, this information did not satisfy the lender’s responsible lending obligations. From the information available to the financial mentor she was concerned that the lending was unaffordable from the beginning. Fiona’s current budget showed a monthly deficit of about $200. The financial mentor said Fiona’s financial situation now was about the same as when she borrowed the money and considered the lending must have been irresponsible
The lender refused to engage further with the financial mentor, saying:
- they have a careful application process
- the loan was affordable
- if Fiona had withheld information, then the application was fraudulent
- they had already offered to reduce the payments to allow her to sell her car or house.
We asked the lender how they satisfied themselves that Fiona could afford the loan. The lender gave us more information than they had given the financial mentor and we could see they had made a mistake when calculating affordability. The lender had mistakenly treated Fiona’s fortnightly direct debit to her power company of $142 as her monthly mortgage payment and had not included any mortgage payments in her budget.
If the application had been properly assessed, Fiona’s budget was indeed in deficit, and the lending was not responsible.
We suggested that the lender refund all the fees and interest they had charged Fiona, in accordance with section 89(1)aaa of the Credit Contracts and Consumer Finance Act 2003. Fiona accepted our suggestion, but the lender continued to deny irresponsible lending and declined to make further submissions.
We issued a final decision, known as a recommendation, finding that the lender was obliged to refund all the interest and fees they had charged, reducing Fiona’s debt to $1,150. We also encouraged the lender to allow Fiona to repay the debt at an affordable $40 a fortnight with no further fees or interest to be added to the loan balance.
Fiona accepted the recommendation and the complaint was resolved on this basis.
Insights for participants
If you make a mistake about lending affordability, we encourage you to work with your client to find a solution. If the mistake is so serious that the loan would have been unaffordable, the best place to start is to refund the interest and fees you have earned from the loan. We suggest you then ask your client what they can afford to pay to allow them to repay the debt without causing them further financial hardship.