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Spiralling debt not responsible lending

In July 2019 Fiona borrowed $1,000 from a finance company for funeral related costs. Fiona told the finance company she was on a benefit and also working as a teacher aide, with two children. The affordability assessment showed a weekly surplus of $160 so the finance company was satisfied that Fiona could afford the loan repayments of $50 a week. The finance company charged an establishment fee of $400 and added a repayment waiver premium of $200 to the loan balance.

At the end of July, Fiona borrowed another $1,000 for birthday expenses, plus another establishment fee of $400, and a repayment waiver premium. Fiona’s payments were now $80 a week. In October 2019 Fiona borrowed another $600, again incurring an establishment fee of $400 and a repayment waiver premium, increasing her payments to $90 a week.

Fiona met all the payments until December 2019, when the payments started dishonouring. Fiona went to a financial mentor for help. The financial mentor told the finance company that Fiona’s income as a teacher aide stopped during the school holidays and that she was responsible for five children. The financial mentor said that Fiona could not afford the weekly payments of $90 and made a financial hardship application for Fiona.

The finance company agreed to reduce the payments to $70 a week, but this was still unaffordable for Fiona. However, when school recommenced in February, so did Fiona’s $90 weekly payments.

In March 2020 Fiona applied for another $700 for birthday expenses. Because Fiona was now meeting the loan repayments, the finance company approved the loan. In April 2020, when Fiona was no longer working, as a result of the Covid-19 lockdown, she could not afford the loan repayments. The finance company agreed to reduce the payments to an affordable $50 a week. When school reopened at the end of May, Fiona recommenced payments at $90 a week.

In June 2020 Fiona borrowed another $1,000 for winter uniforms and clothing. Although the finance company said the lending was affordable, Fiona immediately defaulted and went to another financial mentor for help.

The financial mentor was concerned that the decisions to lend might not have met responsible lending guidelines and asked the finance company for comment. The finance company was satisfied that the lending was affordable, and the financial mentor complained to FSCL on Fiona’s behalf.



The financial mentor focused on the June 2020 loan application. By now the finance company knew Fiona had five children but had only allowed $100 a fortnight for food. Fiona’s bank statements showed that she spent $550 on food a fortnight. The finance company had also only allowed $110 a month for ongoing costs like childcare, vehicle running costs, personal expenses, including clothing, for a family of six. Finally, the bank statements showed payments to five other lenders totalling $650 a fortnight.

The financial mentor said lending in these circumstances was not responsible and the lender should write off Fiona’s debt and refund all the payments she had made.

The finance company responded that they could not be expected to ‘guess’ as to a borrower’s true financial position. The finance company agreed that allowing $100 a fortnight for food was inadequate, but even if they recalculated allowing $300 a fortnight for food the lending would be affordable. The finance company were satisfied that their lending decisions were responsible.



Under section 9C(3)(a)(ii) of the Credit Contracts and Consumer Finance Act 2003 (the Act) the lender must satisfy themselves that the borrower can afford to repay the loan without suffering substantial financial hardship.

While the lender is, to some extent, dependent on the information the borrower discloses, if they have information to show that the lending is unaffordable the lender should decline the application. In this case, Fiona’s failure to tell the lender that her income was unstable and that she had five, not two children, influenced the lender’s original decision to lend.

However, by January 2020 the lender knew that Fiona was not paid during the school holidays and had five children. It was our view that, when this information was taken into consideration, the decisions to lend in 2020 were not responsible. The finance company had underestimated food costs and was using a buffer, set aside for emergencies, to allow for the usual necessities of life. Bank statements indicated that Fiona’s financial position was deteriorating.

Responsible lending obligations do not just apply to the decision to lend. Lenders are also obliged to ensure that credit-related insurance, including repayment waivers, will meet the borrower’s requirements and objectives. There was no evidence that the finance company discussed the repayment waiver with Fiona, and it was our view that she was not in a position to make an informed decision about whether to purchase the repayment waivers.

Finally, we were also concerned by the amount of the establishment fee when compared to the amount of the loan. For example, in October Fiona borrowed $600 and paid a $400 establishment fee. Under the Commerce Commission v Sportzone Motorcycles Ltd and MTF Ltd case an establishment fee must be closely related to the work of establishing a loan.

The finance company said that every year they review the establishment fee to make sure that it relates closely to the work involved. The finance company drew our attention to the fact that the June 2020 loan incurred an establishment fee of $350 because their costs had reduced.

We were pleased to see that the finance company reviews their fees in this way.



We suggested that the finance company should refund all the costs and interest relating to the 2020 lending, and all repayment waivers charged, and allow Fiona to repay the residual debt at an affordable rate at no further cost to her. The finance company agreed, reducing Fiona’s debt from $5,800 to $2,200.

Fiona’s financial mentor said that she would be able to pay $20 a week towards the reduced debt of $2,200 and the complaint was resolved on this basis.


Insights for participants

Sometimes borrowers do not disclose their true financial position to a lender because they are experiencing significant financial hardship. In this case, the finance company could not have known that Fiona’s income was unstable and that she had more children than she had disclosed on the loan application.

However, responsible lending obligations rest with the lender. If the lender has information, like bank statements, that show the lending is unaffordable the lender must make more enquiries. In this case the lender said:

Customer is a young single parent aged 39. She earns good money and also is supported by WINZ assistance to pay rent however her spending habits may not be ideal in a true financial sense and therefore needs a budget adviser to help manage money better and get out of living on a debt money mentality.

Careful assessment of every loan application can help people like Fiona avoid the debt spiral.

Financial mentors can also assist a borrower with preparing a budget and negotiating with lenders for hardship relief and reduced loan payments.