From time to time we switch from Motor Vehicle Disputes Tribunal decisions to those from private financial services complaints service Financial Services Complaints Limited, which contain lessons dealers and financiers can learn.
Responsible lending obligations rest with the lender.
In October 2022 Parvati saw a car advertised on Facebook by an Auckland car yard.
She contacted the car dealer who told her that she should go on the dealership’s website and choose three cars that she liked the look of.
The dealer would then decide which would be best for Parvati. None of the cars on the dealer’s website had any indication about price.
Parvati selected three cars, and the dealer came back to her offering her a 2007 Nissan Fuga.
Parvati still didn’t know how much the car would cost, but the dealer told her not to worry, he would sort out the finance so she could buy the Nissan.
The dealer asked Parvati for her bank statements, payslips, confirmation of benefit income, details of her court fines, and driver’s licence.
Parvati gave all the information to the dealer, and understood he would submit the loan application to the lender.
The lender calculated that Parvati’s weekly income was $645, based on benefit payments and income from Parvati’s part-time job.
The lender calculated Parvati’s expenses as $345. Parvati’s rent was deducted from her benefit, so wasn’t included in either her income or expenses.
The lender calculated that Parvati had a weekly surplus of $300. Allowing for a $90 weekly buffer, the lender was satisfied Parvati could afford the loan repayments of $142 a week.
Because Parvati didn’t live in Auckland, the dealer paid for her to fly to Auckland to collect the car.
When Parvati arrived in Auckland, she discovered the purchase price of the car was nearly $17,000.
The lender had calculated, for its internal purposes, that the car was worth $9000 but didn’t share the information with Parvati.
She signed a loan agreement borrowing nearly $19,000, including add-on insurance and fees. Parvati defaulted on the loan repayments immediately.
Over the following months she continued to struggle to repay the loan and went to a financial mentor for help.
When the financial mentor looked at Parvati’s income, he was concerned immediately that the loan wasn’t affordable and contacted the lender to discuss this.
The lender was satisfied that its lending was affordable and that it had met its responsible lending obligations but could see that Parvati was struggling financially.
The lender offered to reduce the interest rate on Parvati’s loan from 29% per annum to 8.5% if Parvati could show she could afford payments of $100 a week.
Parvati’s financial mentor was confident that she would be able to afford the $100 weekly payments.
However, the financial mentor didn’t think that the lender’s offer went far enough and was still concerned that the lender hadn’t met its responsible lending obligations and, after talking it through with Parvati, referred the complaint to FSCL.
DISPUTE
The financial mentor said that Parvati was working on a casual, part-time basis and that her income wasn’t regular or secure.
Her payslips, which she had given to the dealer, showed that her income for the last three months was, on average, $475 a week.
The financial mentor said that the lender appeared to have made a mistake when calculating Parvati’s income and, as a result, the lending had been unaffordable.
The lender did not accept that the dealer completed Parvati’s loan application form.
It said that it doesn’t work through dealers and that Parvati entered the information about her income, expenses, and employment conditions directly on to its system.
Parvati had said that she was working part-time, earning $640 a week, and if she was a casual employee, she should have recorded this on the loan application. The lender believed that it had met its responsible lending obligations.
REVIEW
As part of its process, FSCL asked lender for the information that it based its affordability calculations on.
The lender had only received bank statements for the previous six weeks, because Parvati had changed banks, and didn’t have the payslips provided to the dealer.
Although the lender maintained that Parvati had completed the online application form herself, after speaking to Parvati, it seemed more likely that the dealer had taken care of this for her.
However, even if Parvati had completed the application herself and estimated her income as $640 a week, the lender was obliged to verify her income.
It’s standard industry practice for a lender to rely on 90 days of bank statements to verify income and expenses.
If the lender had taken more care, it would have discovered that it didn’t have 90 days of bank statements and (would have) asked Parvati for more information.
With the benefit of this information, the lender would have seen that Parvati’s weekly income over the
last 90 days varied from $90.15 to $580.74, with an average of $475 a week.
Allowing for a 30% buffer, Parvati couldn’t afford the loan and, as a responsible lender, the lender would have declined to lend.
“As part of our review, we noted our concerns about the dealer’s sales tactics and queried whether the power imbalance meant that we could say that Parvati was a willing buyer.
“We also had some concerns that the lender had also underestimated Parvati’s expenses.
“However, based on the income calculation alone, the lender had not satisfied itself that Parvati could afford to repay the loan without suffering substantial hardship,” FSCL said.
“The lending breached section 9C(3) of the Credit Contracts and Consumer Finance Act 2003.
“The remedy for a breach of this section is a refund of all the interest and fees charged over the life of the loan.
“The lender is also obliged to restructure the loan so that no interest and fees are charged in the future.”
RESOLUTION
“Parvati and the lender accepted our preliminary decision. The lender agreed to refund about $6500 in interest and fees to the loan balance and allow Parvati to repay the loan at $100 a week incurring no future interest or fees.”
INSIGHTS FOR PARTICIPANTS
“The Credit Contracts and Consumer Finance Act 2003 now requires lenders to verify the information given to them by people applying for a loan.
“While lenders can use ‘scraping’ software to extract information from bank statements to calculate affordability, the responsible lending obligations rest with the lender.
“In this case, the software didn’t identify that the calculation was based on six weeks of bank statements rather than the industry standard of 90 days, resulting in an unaffordable loan,” FCSL said.
THAT’S NOT MY DEBT
In March 2022, Linda applied for a loan with her sister, so that her sister could buy a car.
Linda expected that her sister would make all the loan repayments, as she would be the one using the car.
However, after a few months, Linda’s sister stopped making repayments and the car was repossessed.
When the lender asked Linda to pay the rest of the amount owing on the loan, she explained that she took out the loan for her sister’s benefit, so her sister should be liable for the debt.
Linda asked the lender to remove her name from the loan contract.
The lender refused to remove Linda’s name from the contract, so she complained to FCSL.
DISPUTE
Linda said she only agreed to be a co-borrower on the loan to help her sister.
Linda said that she did’t use the car, so didn’t think she should be liable for the debt.
The lender said that Linda was listed as a co-borrower, so she was jointly liable for the debt. The lender said that the terms of the contract had been explained to Linda before she signed the contract, and it would hold her responsible for the amount still owing.
REVIEW
“We told Linda that when she agreed to be a co-borrower on the loan, she became jointly responsible for the loan repayments,” FCSL said.
“We explained that because there was still an outstanding amount owing on the loan, we couldn’t ask the lender to remove Linda’s name from the loan contract.
“We found that the lender was entitled to pursue Linda for payment.
“We suggested that Linda discontinue her complaint, as we were unlikely to find that she should be removed as a co-borrower. Linda accepted our view.”
Insights for participants.
“In this case the lender and trader have done nothing wrong.
“It’s important for consumers to carefully consider the risks of co-borrowing on a loan,” FCSL said.
“A co-borrower has a shared responsibility to repay the debt, even if they didn’t take out the loan for their own benefit.
“If the other borrower is unable to pay the loan, the co-borrower may have to pay the entire amount still owing.
“Still, probably not a bad idea to ensure co-borrowers are strongly warned of their role in the process,” FCSL said.