New irresponsible lending principles tested

Over several years, Ross took out a number of loans with a finance company. In July 2015, he approached it about taking out a $1,500 loan.

The finance company initially declined based on the fact Ross had unpaid balances of $3,553 on four other loans. However, it then agreed to consolidate the four loans into a new loan (loan A), and loan Ross the additional $1,500 (loan B) if he had a guarantor for that loan. Ross’s friend Joey agreed to guarantee loan B.

The finance company drew up the two separate loans so that Joey would not be liable for the arrears on loan A. Loan A had an establishment fee of $450, a bank fee of $5, and monthly administration fees of $25. The total to pay over the life of the loan, including interest, was $5,265.53, payable at $75 per week for 71 weeks. Loan B had an establishment fee of $300 and a monthly administration fee of $15. The total to pay over the life of loan B, including interest, was $2,040.44, at $75 per week for just over 27 weeks.

Between July and December 2015, Ross made a payment of $150 and Joey a payment of $1,350, both towards loan B. No other repayments were made towards the two loans.



In November 2015, Ross complained to FSCL, claiming that the total balance to pay over the life of loan A should have only been $3,553 and that the finance company had failed to credit all the payments he had made to previous loans.

Ross also claimed he had paid large amounts to the finance company over the years and that he while was happy to pay back loan B, he was not prepared to pay anything further towards loan A.



We reviewed the information the finance company and Ross provided to us. We found that the balances of the loans consolidated to become loan A were correct and that the finance company had not misappropriated any repayments. However, we found that the finance company had not loaned responsibly to Ross.


No consideration of substantial hardship

The finance company provided no evidence to show how it made the decision that Ross was in a position to pay $150 per week towards loans A and B. Ross’s payment history was irregular and usually below the required amount. In our view, he was never going to be able to pay $150 per week towards the loans.

Because of this, the finance company had failed to meet the lender responsibility principles outlined in the Credit Contracts and Consumer Finance Act 2003 (the CCCF Act). Under these principles, the finance company should have taken steps to satisfy itself that Ross could afford the loan repayments without suffering substantial hardship (that is, while continuing to meet other necessities, including accommodation, food and transport). Although Joey had guaranteed loan B, the finance company still had to be satisfied that Ross could afford to pay $150 per week.

There was also no evidence the finance company had assessed whether Joey could afford the amount he had guaranteed, without suffering substantial hardship.


Two establishment fees unnecessary

We considered it unnecessary for the finance company to have established two separate loans, resulting in establishment fees totalling $750. Two loans were established because Joey did not want to be liable for historical arrears on the earlier loans. However, this could have been managed by Joey’s guarantee being limited to $1,500.



Under the CCCF Act, the finance company was required to compensate Ross for losses he had suffered as a result of its breach of the lender responsibility principles. This included writing off interest accrued on loans A and B, and the establishment fee ($300) and credit fees ($50) on loan B.

We considered a reasonable and practical way to resolve the complaint was for the finance company to:

  • consider loan B to be paid in full, because the principal ($1,500), had been paid by Joey ($1,350), and Ross ($150). This meant writing off interest of $151.75 and fees of $350.
  • reduce the establishment fee on loan A from $450 to $375 (the average of the two establishment fees on loans A and B), because it was not necessary for Ross to take out two loans.
  • freeze the balance on loan A at $3,933 (the original principal amount of $3,553 plus the $375 establishment fee and a $5 bank fee). This was because there had been no explanation that interest would begin to accrue on the consolidated balances of the four loans, when it had not been accruing previously.

The finance company did not agree with our decision, arguing that the lending decisions on the historical loans were made when the loans were originally taken out, before the responsible lending principles were introduced on 6 June 2015.

However, we pointed out that the principles apply to any variation of a contract that takes effect on or after 6 June 2015. In our view, consolidating the four existing debts into a new credit contract in July 2015 was a variation of the four existing credit contracts.

We remained of the view that the balance Ross had to pay was the frozen amount of $3,933. Ross accepted our decision and agreed to start paying $40 per week.