Unaffordable co-borrowing

Jake, a beneficiary with a partner and a small child, needed a loan to buy a car. Jake’s father, Daniel, lived in another city and agreed to help Jake get the loan. The lender assessed the application on the basis that Jake and Daniel were co-borrowers. The lender calculated their combined income as $1,550 a week. Although some of their expenses were assessed individually, the lender allowed a total of $366 to cover all Daniel, Jake, and Jake’s family’s weekly living costs.

The lender calculated that Jake and Daniel had a weekly surplus of $340 and could easily afford the loan repayments of $260. The lender loaned Jake and Daniel $30,000 to buy a vehicle costing $27,000. The extra $3,000 covered insurances and the establishment fee.

Jake and Daniel started defaulting on payments almost immediately. Matters were further complicated when Daniel, a seasonal worker, had his work hours reduced. Within about nine months Jake applied for hardship relief because after paying rent, other fixed costs, and the loan repayment, he was left with only $50 a week to feed his family.

The lender agreed to reduce Jake’s payments from $260 to $150 a week for three months, but even then, Jake’s payments were erratic and, when the three months ended, Jake was still experiencing financial hardship.

Jake went to a financial mentor for help. The financial mentor reviewed Jake’s financial position and questioned how the lending could have been approved in the first place. The financial mentor complained to the lender about irresponsible lending.

The lender was confident the lending was responsible and referred to their affordability assessment showing that Jake and Daniel had a budget surplus. The financial mentor disagreed with the lender’s calculations and complained to FSCL on Jake’s behalf.

Dispute

The financial mentor said it was obvious from the outset that Jake and Daniel were not co-borrowers. They were living in different cities and the lender’s calculation did not include expenses to support two households.

To resolve the complaint, Jake offered to surrender the vehicle if the lender would agree to return the $12,000 of loan repayments that he and Daniel had made. Jake would use this money to buy a more modest vehicle.

The lender was satisfied with their decision to loan to Jake and Daniel, commenting that parents often want to help their child buy a vehicle. However, the lender was prepared to refund all the interest and fees that had been paid over the life of the loan and refund half the cost of the insurances that had been added to the loan balance. This would reduce Jake and Daniel’s debt from $29,000 to $17,000.

The lender suggested that the best outcome would be for Jake to surrender the vehicle to be sold. If the vehicle sold for more than $17,000, Jake would receive the surplus, but if the vehicle sold for less, he could enter into an affordable repayment agreement, incurring no further interest or fees.

Jake did not accept the lender’s offer.

Review

It was our view that the lender should not have treated Jake and Daniel as co-borrowers. In reality, Jake was the main borrower and Daniel was the guarantor. If the lending had been assessed on a borrower/guarantor basis the loan would not have been affordable and the application would have been declined.

The lender had breached their responsible lending obligations as set out in section 9C(3) of the Credit Contracts and Consumer Finance Act 2003 (the CCCFA), which says a lender must be satisfied that the borrower will be able to make the loan repayments without suffering substantial financial hardship. The remedy under the CCCFA is a refund of all the interest and fees charged, which had already been offered by the lender.

As the lender had already offered to refund all the interest and fees charged, as well as half the premiums offered, we were satisfied the lender’s offer was in line with what we would have recommended to resolve a complaint about irresponsible lending.

We then had to decide what should happen to the residual debt of $17,000. The lender was prepared to reduce the payments from $260 a week to $160 a week, which would have allowed the loan to be repaid within the original term, but with no further interest and fees charged.

However, we did not think that Jake would be able to afford these payments. We also noted that the car was uninsured and Jake’s road user charges were unpaid.

When viewing Jake’s circumstances as a whole, we decided that the best outcome would be for Jake to surrender the vehicle to be sold.

We then considered whether compensation for inconvenience was appropriate. While the financial pressure on Jake would have been stressful, this stress had to be balanced against the convenience of Jake having the use of a vehicle. We decided that compensation for stress caused by financial pressure was not appropriate.

Resolution

We recommended, and Jake accepted, that his debt be reduced from $29,000 to $17,000. We also recommended that if Jake voluntarily surrendered the car within seven days of signing the settlement agreement, the lender should agree not to pursue Jake for any shortfall owed.

Both parties agreed to settle the complaint on this basis.

Insights for participants

Lenders must take care when assessing loan applications to understand the borrowers’ intentions and structure the loan accordingly. A co-borrowing loan structure is generally not appropriate where a loan is intended for one borrower’s benefit and that borrower is making the loan repayments alone. Instead, the lender should assess the main borrower’s ability to afford the loan with the other borrower being treated as a guarantor.