Jade successfully applied for a car loan of approximately $15,000 in July 2019. Jade’s income decreased in 2020 when her adult sons moved out of her home and no longer paid her board. Jade had one dependent child in her care.
Jade repeatedly missed bill payments and borrowed money from family in order to repay her car loan. With the assistance of a budgeting service, Jade complained to FSCL that the loan was unaffordable.
Jade said that her income and expenses were inaccurately assessed and that she did not have enough money to repay the car loan. She said that the lender had not clarified what the board payments covered, and they had incorrectly not allowed for the additional costs of her adult sons’ groceries. Further, Jade said the boarder income from her adult sons was inconsistent due to them being in and out of work. Finally, her Winter Energy Payment from Work and Income New Zealand (WINZ) should not have been included in her income assessment due to it being temporary.
The lender said that they were satisfied they had fulfilled their lending responsibilities and conducted the necessary enquiries into Jade’s income and expenses. They said that Jade’s sons had not disclosed the additional expenses incurred such as groceries, nor said that their board payments were inconsistent. The lender maintained that Jade could have serviced the loan if her adult sons had continued to pay board.
We found that the lender had not met their lender responsibility obligations under section 9C(3)(a) of the Credit Contracts and Consumer Finance Act 2003 (the Act), as they could not have been reasonably satisfied that Jade could make the loan repayments without suffering substantial hardship.
The lender contacted both of Jade’s adult sons to confirm their boarding payments. The lender used 80% of the boarders’ contributions in Jade’s income assessment to allow for additional expenses. We found that rather than discounting the boarder income, the lender should have allowed for the cost of feeding two additional adults in their expenses assessment. At the very least, the lender should have asked Jade and her sons what expenses the board payments covered.
Given that the boarders were Jade’s immediate family members, we accepted it was most likely that Jade was providing their meals. Against this, we also weighed the likelihood that her sons, as working adults, could have been taking care of their own weekday lunches and having occasional meals with friends.
We considered the fairest way to approach Jade’s food expense was to use an estimate for a two adult and one child household. We used Statistics New Zealand’s household expenditure statistics to estimate the food expense. For all other estimated expenses, we used the statistics for a household with one parent and one child.
We noted the risks of including boarder income from family members, as the lender needs to be satisfied that a borrower is able to service the loan for the entire loan term. Family members are less likely to make payments if they are struggling financially, and they are unlikely to stay long term (particularly in the case of young adults). The lender should consider these factors before relying on boarder income as part of the assessment.
We found that the lender should not have included the Winter Energy Payment in Jade’s income assessment. The payment is temporary and cannot be relied upon for the entire loan term.
When we adjusted the assessment, Jade had a weekly surplus of approximately $45 before servicing the loan. The loan repayments would put Jade’s budget in a weekly deficit. The main difference was the increased food allowance.
We were satisfied that it was appropriate to apply the remedy for a breach of section 9C(3) of the Act outlined in section 89(1)(aaa). The lender was to credit the amount Jade had already paid in interest and fees back to her loan account. Crediting the interest and fees put Jade’s account with the lender in surplus by almost $2,000, which was to be paid back to Jade.
The lender did not agree with our preliminary decision but did not provide any new evidence to persuade us to change our view. We did not accept the lender’s argument that if the boarders’ grocery expenses were included in the assessment, then their income should have also been included. Jade was the sole applicant for the loan. The board payments were to be spent on increased expenses generated by two adult children in the house. While the lender accounted for the board payments in Jade’s income, they did not account for the subsequent increased expenses.
We upheld our preliminary decision, and the lender refunded the $2,000 surplus to Jade.
Insights for participants
Lenders should ask the borrower what expenses are covered by any income generated from board payments. Lenders should take care to account not only for the income from boarders, but also for the increased expenses incurred by having additional adults within a household. Lenders should also independently verify that the amount of the board payment declared by the borrower is correct.