Yan was a senior IT professional. In early 2016, he secured a 6-month contract working as a consultant, where he would earn $650 per day.
In June 2016, Yan decided to borrow $40,000 from a lender to buy a luxury car. The loan was set up with Yan paying $1,200 per month for a period of 4 years.
By October 2016, Yan’s loan had fallen into arrears. Yan’s 6-month contract had ended, and he was struggling to secure more work, meaning his income was substantially reduced and unstable.
Over the next few years, Yan and the lender fell into a cycle. Yan would fall behind on payments, the lender would threaten to repossess the car, and Yan would make a lump sum payment at the last minute, bringing his payments up to date.
During this time, Yan sold his boat to help make repayments. Yan considered selling the car and applying the payments to the car, but changed his mind when he realised the proceeds wouldn’t come close to paying off the loan balance. Eventually in January 2019, after more missed payments and repossession warnings, the lender repossessed the car. After the car was sold, there was still a shortfall of $25,000 owing on the loan.
Over the next year, Yan and the lender made arrangements for Yan to pay off the balance of the loan, but the arrangements were repeatedly broken with Yan still struggling to secure stable income.
On 23 December 2020, the lender issued Yan with a final demand, requiring him to contact them about repayments to avoid court action. When Yan responded later that day, he received an automatic response that the lender had closed for the holidays.
Yan was distressed about repaying his loan and the action the lender might take against him, and contacted FSCL for help.
Dispute
Yan complained his loan was never affordable. When he signed up with the lender, he was already halfway through his 6-month contract, with no work lined up for when it finished. Yan said although in retrospect he never should have applied for the loan, the lender had a responsibility to make sure it was affordable.
Yan also complained about the lender’s conduct when enforcing the loan, and particularly the fact that they sent him a final demand just before Christmas and then didn’t respond to his attempts to get in touch. This left Yan worried he would be summoned to court over the holidays.
The lender said they checked the loan was affordable at the time Yan agreed to it. The lender said they knew Yan was on a short-term contract, but had reason to believe he would have enough income to service the loan for its entire term because:
- Yan had previously been employed in senior roles, which suggested he would be able to secure another contract or further work, and
- Yan was the director and shareholder of several companies, which suggested he was a sophisticated businessman capable of generating further income.
Review
We reviewed all documentation and written records relating to Yan’s loan.
Under responsible lending laws, lenders are required to make reasonable enquiries to determine whether a borrower can meet their obligations without suffering substantial hardship. Reasonable inquiries into a borrower’s income include looking into the sources and stability of the borrower’s income.
Given Yan’s contract was planned to end in a matter of months after the loan was issued, we thought the lender should have made enquiries with Yan about his prospects of obtaining further work when that ended. Yan’s last contract had ended 17 months before the 6-month one began in early 2016. There was no pattern of consistent contract work, and we thought the lender should have made more enquiries about this.
We didn’t think the fact that Yan was a director and shareholder of a few companies automatically suggested he was a financially sophisticated borrower. There was no evidence these companies were profitable or earning any income.
Lenders also have an obligation to give borrowers information about applying for relief where they are experiencing financial hardship. The lender had not done this throughout the years of missed payments by Yan. Even though Yan often made up his payments, it was clear he was struggling to meet his expenses throughout that time.
Finally, we agreed it was inappropriate for the lender to issue a final demand just prior to Christmas, without responding to Yan’s attempts to get in touch.
Resolution
The usual remedy where a lender breaches a responsible lending obligation is to write off all the interest and fees payable on a loan so the borrower is only liable for the principal amount they borrowed. Given we thought the lender had failed to make sufficient enquiries to determine the affordability of the loan for Yan, we issued a preliminary decision recommending the lender write off the interest payable on the loan, which would leave a balance of $785.
We also recommended the lender compensate Yan $785 for the stress and inconvenience he suffered from the final demand being served just prior to Christmas and the lack of information from the lender about hardship relief. This compensation would have the effect of writing off the loan.
The lender disputed our preliminary decisions for a number of reasons, including that, during our investigation, it was discovered that Yan had failed to disclose significant debts to the lender at the time of the loan. We agreed this submission had merit, and considered changing our final decision so that Yan would take a proportion of responsibility for his situation. This would have the effect that Yan would remain obliged to repay a small part of the loan balance.
However, before issuing a final decision, we asked the lender to reconsider accepting our preliminary decision. The relationship between the lender and Yan had broken down irreparably, and Yan was still struggling to secure a stable income, so he would only be able to make minimal repayments towards any remaining loan balance. In the circumstances, we thought it might be more trouble that it was worth for the lender to recover a small portion of the loan balance from Yan.
The lender agreed to accept our preliminary decision in the circumstances and write off the balance of the loan.
Yan was relieved with the outcome.
Insights for participants
A borrower having a high income doesn’t necessarily mean any loan will be affordable for them. Lenders need to ensure they make appropriate enquiries into the stability of a borrower’s income and their ability to make repayments over the life of the loan.
