The credit facility
In March 2013, Toby applied for a revolving credit facility to purchase a laptop from an electronics store (costing $737). The relevant information obtained by the lender was that Toby had an annual income of $45,000 and had been employed at an insurance company for 6 months. The lender granted Toby a credit limit of $4,000.
The credit limit increases
In the following years, Toby made 15 requests to increase his credit limit. In 2014, 5 credit limit increases were approved by the lender — Toby’s limit increased from $4,000 to $7,500. When the increases were granted, generally Toby’s balance was close to the credit limit. On one occasion his balance was over the credit limit by about $70.
The lender based its decisions to increase the limits on Toby’s verbal verification of his take home pay and rental payments, and because Toby appeared to be making the minimum monthly payments.
Unforeseen hardship application
Toby then suffered an injury and, although he received ACC payments for a time, he was unable to work. In the end, Toby’s employment ended and he went on the benefit.
In early 2016, Toby contacted the lender about applying to vary the credit contract on the grounds of unforeseen hardship due to his loss of employment. The lender reduced Toby’s monthly interest payments by 60% and allowed him to make reduced payments. However, Toby was unable to make any payments towards the debt. By this time, Toby’s balance was $8,146.42 (being over his credit limit of $7,500).
Toby’s complaint
Toby complained to FSCL that the lender should never have given him the original $4,000 credit limit because he only asked for enough credit to buy the laptop. Toby said that because his lender granted him a credit limit of $4,000, he fell into further indebtedness.
Toby told us that in March 2013, when he originally sought the revolving credit facility, he already had other debt of around $25,000. Moreover, Toby said that between 2013 and 2014 his financial situation did not improve; he changed jobs but his salary remained about the same. Toby implied the lender should not have increased his limit because his income had not increased.
Toby said the lender had loaned to him irresponsibly and he wanted it to reverse all interest applied to his account, and freeze his account.
Our review
We asked Toby to provide us with a copy of his budget. This showed Toby had combined debts to lenders and WINZ, and fines, of approximately $48,500. In addition, it appeared Toby was in deficit by $245.45 a week.
We explained to Toby that the responsible lending provisions in the Credit Contracts and Consumer Finance Act 2003 and the Responsible Lending Code, came into force in June 2015. Prior to June 2015, there were fewer obligations on lenders to assess whether customers could afford credit.
In Toby’s case, all of the lender’s lending decisions occurred prior to June 2015. This meant we needed to assess whether the lender’s decisions to lend to Toby were fair and reasonable with regard to the law as it was prior to June 2015.
It appeared the lender was unaware that, when Toby originally sought the credit in 2013, he had existing debt of $25,000. However, in 2013 the lender was not obliged to look at whether Toby had other debts before providing the credit. We thought it was reasonable for the lender to grant Toby a credit limit of $4,000 based on an income of $45,000. Similarly, the credit limit increases appeared reasonable based on Toby’s income, outgoings, and payment history.
We noted that if the lender had made similar decisions under the post-June-2015 regime, we may have considered the lender to have loaned irresponsibly. This is because the lender did not carry out full assessments of Toby’s financial position, or look into Toby’s actual requirements and objectives in seeking the credit and credit limit increases.
We said, applying the law pre-June 2015, the lender had not provided credit irresponsibly to Toby and his complaint should be discontinued. We suggested Toby may want to speak to his budget adviser about whether there were bankruptcy or no asset procedure mechanisms available to him.
Our insight
The responsible lending regime came into force in New Zealand in June 2015. For lending decisions made prior to this, there were fewer obligations on lenders to enquire into their customer’s circumstances and explain the loan terms.
