Mistakes during affordability assessment

In 2021 Klaus traded in his existing vehicle for a new car. Klaus needed to borrow an additional $12,000 to pay for the new car so the car dealer helped Klaus apply for a loan. Using information gathered directly from Klaus and from Klaus’ last three months of bank statements the lender calculated that Klaus had weekly income of $1,100, expenses of $900, leaving a weekly budget surplus of $200. The lender calculated that Klaus could afford the $275 fortnightly loan repayments.

At the time Klaus applied for the loan he was working about 60 hours a week across two jobs. Unfortunately, this was too much for Klaus and his doctor recommended Klaus leave one of the jobs. Klaus started working 40 hours a week, but the drop in income meant that he could no longer afford to repay the loan.

Klaus contacted the lender and asked if he could claim against the health waiver he had purchased when he borrowed the money. Unfortunately, there was an exclusion for mental stress, so Klaus did not qualify for cover. Klaus then submitted a hardship application, asking to reduce his payments by half. The lender suggested Klaus go to a financial mentor for help.

The financial mentor helped Klaus submit a hardship application, reducing his payments by half for two months, which was affordable for Klaus. When the two months were up, Klaus’ financial situation was no different and he asked to extend the relief period. The lender agreed to a four-month extension but said that they would not be able to extend the hardship relief period any further.

During this time Klaus was referred to a different financial mentor who looked back at the original loan application and had some concerns that the loan may have been unaffordable in the first place.

The financial mentor complained to the lender they had not met their responsible lending obligations when lending to Klaus. The lender did not agree, and the financial mentor complained to FSCL on Klaus’ behalf.

Dispute

The financial mentor was concerned that the lender had only allowed $80 in Klaus’ budget for food when his bank statements showed he was spending about $200. Because Klaus was working such long hours, he was spending a lot of money on takeaways. The lender had also only allowed $100 for board when Klaus was actually paying $180, as confirmed by Klaus’ tenancy agreement obtained during our investigation. The financial mentor said that if the lender had allowed for an additional $200 in Klaus’ budget for his food and rent, the loan would not have been approved.

The lender did not accept the financial mentor’s calculations and said that they had met their responsible lending obligations. The lender’s statistical information showed that the average food allowance for a single adult was $73 per week, so their allowance of $80 was above average.

The lender also did not accept they had made a mistake when entering $100 as Klaus’ rent costs. The lender explained that the car dealer had entered the amount that Klaus had told them and that they could not be responsible for the incorrect information supplied by Klaus.

Review

Under section 9C(3)(a)(ii) of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) the lender was obliged to satisfy itself that Klaus could afford to repay the loan without suffering substantial financial hardship. The Responsible Lending Code gives the lender guidance about how they might do this.

We were satisfied that the lender had made reasonable enquiries into Klaus’ income, but we were concerned that the information the lender relied on to satisfy themselves of Klaus’ food and accommodation expenses was inaccurate.

It was our view that the lender had under-estimated the food costs. Statistics New Zealand data shows that an adult will spend $94.70 per week on food alone, not including non-food items that would usually form part of a borrower’s budget. On this basis we considered the lender had under-estimated Klaus’ food and grocery expenses, without considering his personal circumstances.

It was clear a mistake had been made when entering Klaus’ rent into the budget calculations. It was less clear who was responsible for the mistake. Because Klaus paid his rent in cash, the mistake was not obvious from Klaus’ bank statements.

We weighed the evidence available and were not persuaded that this was a deliberate error by Klaus. Because the incorrect information was entered by the dealer, without any opportunity for Klaus to correct the entry, and the dealer was the lender’s agent, it was our view that the lender must accept responsibility for the mistake.

Either the under-estimated food costs or the mistaken rent amount would have left Klaus’ budget in deficit. We found that the lender had not met their responsible lending obligations and that the remedy in the CCCFA, a refund of all the loan interest and fees, applied. We also suggested that Klaus may like to consider surrendering the vehicle so the lender could sell it to further reduce his debt.

Resolution

We recommended, and Klaus accepted, that the lender refund the interest and fees, a total of about $5,000, reducing his debt from about $15,000 to $10,000.

Insights for participants

To meet responsible lending obligations, lenders must carefully assess a borrower’s income and expenses. We encourage lenders to base their food assessment amount on the higher of a person’s actual food spend or reliable statistical data. If a lender cannot see an expected expense, like rent, on the bank statements submitted to support the loan this, in our view, should prompt the lender to ask for more information.