Maurice, a single parent with two children, needed a new car and applied to a finance company for a loan to buy the car. The lender assessed Maurice’s loan application and determined that the loan was affordable. The lender lent Maurice $12,000 and he went on to buy a 2008 Toyota Corolla.
Maurice agreed to pay $134 a week along with other associated costs including a monthly loan administration fee, and $260 every year to cover the costs of his WOF.
Three months later Maurice’s benefit payments were reduced, and he fell into arrears on the loan. Maurice went to see a financial mentor for help.
The financial mentor was concerned that when the loan was given to Maurice, the lender did not make suitable inquiries to check that he could afford the repayments without getting into difficulty. The financial mentor asked the lender for their affordability assessment. The lender gave the financial mentor the information and the financial mentor concluded that the lender had made a mistake.
The lender maintained they had correctly assessed Maurice’s application, so the financial mentor complained to FSCL.
Dispute
The lender said that Maurice’s weekly budget was about $700 in credit and, from their perspective, Maurice could afford the weekly payments, and they had met their responsible lending obligations.
However, the financial mentor thought that the lender had included income in their assessment that they shouldn’t have. Maurice received several benefit payments from his friends into his account, who for one reason or another, couldn’t receive payments themselves. Maurice then withdrew cash from his account to give back to his friends.
The financial mentor said that these payments shouldn’t have been included as income. The financial mentor also considered that the lender had grossly underestimated Maurice’s expenditure. They calculated Maurice’s budget to be in deficit by around $400 a week.
Review
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.
When we looked at the information and checked the affordability assessment, it seemed, that although the lender had overestimated Maurice’s income and underestimated his expenditure, the loan was still affordable at the time it was taken out.
Income
It is not uncommon for benefit payments to be paid into friends’ and relatives’ accounts. However, a lender cannot be reasonably expected to have made further inquiries that may have uncovered this. It was reasonable for the lender to have included these deposits as Maurice’s income.
Expenditure
We used information from Statistics New Zealand to calculate what a parent with two school-age children would typically spend a week. Using this information, we calculated that Maurice was left with a weekly surplus of $140.75.
As there was much debate over Maurice’s actual spending, an average was taken from the lender’s calculations, the financial mentor’s calculations, and our calculations.
Resolution
Using this average, we considered that Maurice had sufficient surplus weekly income to afford the loan. There was insufficient evidence to suggest that Maurice would suffer substantial hardship because of the lender’s decision to accept the loan.
We recommended that Maurice discontinue his complaint and take up the lender’s offer of permanent hardship relief of reduced loan payments as his income had now decreased. With the help of his financial mentor, Maurice negotiated a repayment plan he could afford.
Insights for consumers
There are two parties when taking out a loan – a lender and a borrower. It is important that the borrower acts honestly and provides full and accurate information when applying for a loan. Responsibility lay with Maurice to tell the lender that the payments going into his account should not have been included in their assessment.
The financial mentor reasoned that Maurice would have to adjust his spending to afford the loan. We agreed, but as with any expenditure, budgeting and sacrifices may have to be made to live comfortably with this new expense. It was not unreasonable to expect that Maurice would have to make some sacrifices elsewhere to pay for the loan and run the car.
Financial mentors can assist a borrower with preparing a budget and negotiating with lenders for hardship relief and reduced loan payments.
