Over the past three years, a loan company had granted Demetri three credit cards and Demetri had built up around $33,000 in debt.
Demetri had taken out the first card while visiting a jewellery store in 2018. A salesperson had helped him fill out a credit card application, to let him buy $14,000 worth of jewellery.
Demetri said he applied for the remaining two credit cards to try and help pay off the first. But, of course, interest kept mounting on the debt, and Demetri found himself unable to make his monthly payments.
In mid-2020, Demetri visited a financial mentor for some help getting out of this debt spiral – by this stage, he was up to around $33,000 in debt. After speaking with Demetri, the financial mentor thought that something had clearly gone wrong with the lender’s processes, and that the lender should never have granted these loans to Demetri.
The financial mentor tried negotiating with the lender, but eventually decided that Demetri needed to bring his complaint to FSCL.
The financial mentor thought the lender had taken advantage of Demetri. She said that Demetri was a beneficiary with a very limited income, and that he was never going to be able to repay his credit card debt.
Worse, Demetri could not read or write in English. Demetri had left school at a very young age and had immigrated to New Zealand shortly after. As a result, Demetri had never learned to read or write in English, and he had not been able to read or understand the loan contracts or disclosure information provided by the lender. The financial mentor said that the lender did not seem to have taken any steps to ensure Demetri understood his credit card contracts.
Demetri also had very little understanding of the risks associated with debt, or the way interest and fees can compound exponentially. His family had never had any credit cards or debts, so he had no experience with credit cards or debt repayments.
During the negotiations, the lender had offered to write off the $14,000 balance of the first credit card, so long as Demetri returned the jewellery he had purchased. They also offered to write off all interest and fees on the other two credit cards. But the financial mentor did not think this was good enough. She thought the lender should be writing off all of Demetri’s debt.
We contacted the lender and suggested that they look at increasing their settlement offer.
We told the lender that they appeared to have committed several serious breaches of their responsible lending obligations. Demetri could not afford these credit card debts, and his difficulty reading English meant that he was clearly a vulnerable borrower.
The lender should have taken extra care to ensure Demetri could afford the loan, and to ensure he understood the terms of each loan contract. They had not done so – the lender had not collected any proof of Demetri’s income and expenses, and they had not taken any steps to ensure Demetri understood the loan. They had not spoken to him at all, instead processing each credit card application entirely online.
This was, in our view, a significant breach of the lender’s responsibilities to Demetri.
The lender agreed to write off all of Demetri’s debt, so long as he returned the jewellery. Demetri accepted the lender’s offer.
Insights for participants
Lenders need to have processes in place for identifying vulnerable borrowers. If a borrower is likely to have difficulty understanding the terms or effect of a loan contract, the borrower should take extra steps to ensure:
- the loan is suitable for the borrower’s needs
- the loan is affordable, and
- the borrower fully understands the terms and effect of the loan.
It can sometimes be difficult to know whether a borrower is vulnerable, so it is important for lenders to take the time to develop robust processes for assessing borrowers’ needs and circumstances. Lenders should also regularly review their processes to ensure they are consistently meeting their responsible lending obligations. Lenders should collect proof of a borrower’s income and expenses so they can satisfy themselves that the loan is really affordable. And where a borrower is particularly vulnerable, the lender should always contact them directly to ensure they understand the terms and consequences of the loan they are applying for.