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The danger of assumption

Ruby, a recent widow, had taken out loans from the same lender ten times previously before taking out another loan in early 2020. This was the first loan to be taken out with only Ruby named on the application, all other applications had been made jointly with her late husband.

Ruby borrowed $4000 which was a refinance of an existing loan and additional funding of $1500. Ruby wanted the loan to go and visit her family overseas. The lender assessed Ruby’s loan application and determined that the loan was affordable.

Ruby agreed to pay $120 a fortnight in loan payments, along with other associated costs including a monthly loan administration fee and $350 establishment fee. She also agreed to pay $650 for repayment protection insurance which was to cover her repayments if she was unable to work.

A year later, Ruby went to see a financial mentor to help manage her finances as she was struggling to meet her loan commitments. Although she never missed a payment, Ruby made substantial sacrifices elsewhere, such as skipping meals and missing rent payments.

The financial mentor was concerned that when the loan was given to Ruby, the lender did not make suitable inquiries to check that she could afford the repayments without getting into hardship. 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 Ruby’s application, so the financial mentor complained to FSCL.


The lender said that at the time the loan was taken out Ruby had excess income in her weekly budget to be able to afford the loan and, from their perspective, they had met their responsible lending obligations.

However, the financial mentor thought that the lender did not make reasonable enquiries as to Ruby’s employment to determine whether her income had changed since the last loan was approved and also whether the repayment protection insurance met her needs.


Loan affordability

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.

Even though Ruby was well known to the lender, the lender still needed to make reasonable inquiries into her income, expenses, and the likelihood of repayment. The lender had allocated $125 for personal expenses such as food, clothes, shoes, medical and dental costs, and church donations in the affordability assessment.

It appeared that assumptions were made based on the lender’s long history with Ruby. The lender presumed that Ruby was still working, however, she had retired since taking out her last loan, and as such her income had significantly reduced.

Using the Inland Revenue Department (IRD) Household Expenditure Guide and her bank accounts we determined that Ruby had a weekly budget deficit of $330, making the loan unaffordable.

Repayment protection insurance

The Act stipulates that lenders must make reasonable inquiries before the borrower enters into a credit-related insurance contract to be satisfied that the insurance will meet the borrower’s requirements and objectives. Lenders must also assist the borrower to make an informed decision about whether to enter into the contract.

Ruby had already retired when she took out the repayment insurance protection, so it would have been impossible for her to have successfully claimed against the insurance.


There was no evidence that the lender discussed Ruby’s employment status with her. Without doing this, we did not consider the lender made reasonable inquiries to be satisfied the repayment protection would meet Ruby’s requirements.

We recommended that the lender pay Ruby back all interest and charges on the loan top-up and refund the cost of the insurance. We did not have enough information to determine whether the original loan was given irresponsibly or not.  

The lender agreed to pay back the repayment insurance and write off the entirety of the remaining loan. The total amount written off was just over $3000.

Insights for consumers

Our role is to investigate the inquiries the lender made before they entered into the loan agreement with the borrower. If the information that the lender is relying on is old or incorrect, we may find that the lender failed to comply with their responsible lending requirements. Up to date and relevant information needs to be gathered for the lender to be satisfied that repayments can be made without the borrower suffering substantial hardship.