In 2012 Min-je borrowed $8,500 to buy a car. Min-je had problems with the car and in September 2012, when her benefit reduced, she stopped repaying the loan. The lender repossessed and sold the car in 2012 for $600. In February 2015 the lender closed off the loan balance of $5,400.
In February 2019 Min-je wanted to buy another car costing $13,500 and applied to the same lender for a $15,000 loan. The loan balance included the establishment fee, broker fee, and add-on insurance. Because both Min-je and the lender had changed names, neither recognised the other from the 2012 lending.
Min-je could not afford the loan repayments on her own so Min-je’s mother-in-law, Nabi, agreed to join her as a co-borrower to help her buy the car. At the time Min-je was living with her partner, their two children, and Nabi.
The lender was satisfied that Min-je and Nabi could afford to repay the loan and approved the $15,000 loan. In April 2019 Min-je stopped repaying the loan. When the lender contacted Nabi about repaying the loan, Nabi was confused, saying that Min-je had agreed to make all the loan repayments.
At around this time Min-je’s relationship with her partner, Nabi’s son, had broken down and Min-je and her two children had moved to another house. Because Min-je had stopped repaying the loan, the lender had immobilised the car, meaning that Min-je could not take the car with her.
In June 2019 the lender repossessed the car and sold it at auction in July 2019 for $1,500.
Towards the end of 2019 the lender tried to contact both Min-je and Nabi about repaying the residual debt of $15,200. Although both made promises to pay, neither Min-je nor Nabi made consistent payments.
There was no further contact until early 2021 when the lender located Min-je. Min-je explained that she was now a fulltime student supporting two children and could not afford to repay the debt at all.
In May 2021 the lender successfully applied to the court for a summary judgment for the 2012 debt. The lender was also successful in an application for an attachment order on Min-je’s benefit. As a result, $35 a week was deducted from Min-je’s benefit and paid to the lender.
In August 2021 the lender again successfully applied to the court for summary judgment for the 2019 debt. Min-je, worried about a second attachment order, agreed to pay the lender $10 a week. Unfortunately, this was unaffordable for Min-je and, when she defaulted, the lender successfully applied to the court for another attachment order of $35 a week.
Min-je approached a financial mentor for help. The financial mentor was worried that $70 a week of Min-je’s benefit income was being diverted to the lender and complained to FSCL on Min-je’s behalf.
Dispute
The financial mentor complained that the lender should not have advanced a second loan in 2019 to Min-je when she had defaulted on the 2012 lending. The financial mentor was of the view that both loans were likely unaffordable because Min-je had defaulted on the payments within months of the loan being drawn down. The financial mentor also questioned the sales process for the cars noting that they had sold within a short space of time for very much less than Min-je had paid for them.
The lender said that because Min-je had changed her name they had not identified her as the same person who had defaulted on the 2012 lending. It was only very much later that they made the connection. The lender did not accept that the loans were unaffordable and was satisfied it had met their responsible lending obligations with respect to the 2019 lending.
In response to the financial mentor’s concerns about the amount the car sold for at auction, the lender said it could not control the amount Min-je paid for the vehicle and that they had sold the vehicle through a reputable auction house and the vehicle sold for within the auction house’s estimate.
Review
We declined to investigate the complaint about the 2012 lending because it occurred too long ago, before the responsible lending obligations came into force in 2015.
With respect to the 2019 loan, we accepted that Min-je’s name change meant that the lender did not realise that she had previously defaulted on a loan with them.
We also explained that under our terms of reference, we cannot investigate a complaint where the subject matter has already been considered by a court. Although we were unable to interfere with the amount set by the court under the attachment order, we could investigate a complaint about responsible lending because this issue had not been explored by the court.
Under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) the lender was obliged to satisfy itself that Min-je and Nabi could afford to repay the loan without suffering substantial financial hardship. On the information submitted by the lender Min-je and Nabi had weekly income of $1,023.43 against expenses of $881, leaving a budget surplus of $142.43. After making the weekly loan repayments of $139 Min-je and Nabi would be left with a budget surplus of $3.43 a week.
When we looked more deeply at the figures used in the lender’s affordability calculation, the budget surplus disappeared and there was a considerable deficit in Min-je and Nabi’s weekly budget.
It was our view that the loan was unaffordable from the outset and that the lender had breached its responsible lending obligations. Under section 89 of the CCCFA the remedy for a breach of the responsible lending obligations is a refund of all the interest and fees charged by the lender. We recommended the lender refund $3,500 in interest and fees towards Min-je’s residual debt.
We also considered the financial mentor’s concerns about the sale of the car. We noted that under section 83Z of the CCCFA the lender, when selling repossessed consumer goods, is obliged to:
- ensure that every aspect of the sale, including the manner, time, place, and terms, is commercially reasonable; and
- take reasonable care to obtain the best price reasonably obtainable for the goods as at the time of sale.
We expressed some concern that a vehicle purchased for $13,500 in February could sell in July of the same year for $1,500. We suggested to the lender that it may wish to reduce Min-je’s debt as an acknowledgement that something may gone wrong in the sale process to cause such a large discrepancy.
The lender disagreed and we were unable to recommend any debt reduction with respect to the price obtained on the car sale when the lender sold the repossessed vehicle. The lender had used a reputable auction house to sell the car and the reserve set by the lender was within the range suggested by the auctioneer. If the lender had departed from this advice and set a higher reserve. the vehicle may not have sold, and further costs may have been incurred.
Resolution
Min-je accepted our finding that the lender should reduce her debt by $3,500. As the attachment order deductions appeared to be causing Min-je financial hardship we suggested that she apply to the court to reduce her payments to a more affordable amount and that the lender agree not to challenge this application.
Insights for consumers and participants
When a vehicle is repossessed and sold it may well sell for less than both the borrower and the lender would hope, leaving a borrower with a significant debt and nothing to show for it. We encourage borrowers to exercise caution when buying a car to make sure it is worth the price being asked by the car dealer. If a borrower is unable to afford to repay a loan, they may also wish to consider selling the vehicle privately, with the lender’s consent, giving them more control over the amount it sells for.