Two recent cases, investigated by the dispute resolution service, Financial Services Complaints Limited (FSCL), highlighted the need for lenders to ensure that they are realistic about a consumer’s spending, before making a decision. approve a loan.
“If a lender makes an error in calculating income or expenses, it can result in a violation of the Credit Conventions and Consumer Finance Act (CCCFA),” says Susan Taylor, Managing Director of FSCL.
In a recent case before the FSCL, it was found that the lender had grossly understated the cost of food and household expenses for a family of four.
Fearing the lender would repossess her car, meaning she wouldn’t be able to take her three children to school and to the doctor, Sarah, a solo mom, borrowed money from her family and friends. friends to feed and clothe her children, so that she can make sure to pay her. auto credit every month.
Struggling to stay in control of her finances, it was when Sarah went to see a financial mentor earlier this year that an assessment showed her budget was around $ 100 a week in deficit, although she was able to borrow $ 12,550 in 2019 to buy a car. , with a weekly reimbursement of $ 120.
Financial mentor helping Sarah wondered how the lender could have rated Sarah’s 2019 loan application as affordable and asked the lender for information on the loan application. The lender said the loan was affordable and there had been no problem as Sarah had always paid her installments.
Dissatisfied, the financial mentor complained to FSCL on Sarah’s behalf that the lender failed to meet its responsible lending obligations because it underestimated Sarah’s living expenses. The financial mentor explained that Sarah was only able to repay her loan by sacrificing other expenses, which put her and her family under considerable stress.
It was found, during FSCL’s investigation, that the biggest variance in the affordability assessment was the amount the lender allowed for food and household expenses each week. The financial mentor granted $ 220 per week, while the lender granted $ 170.
When FSCL asked both parties to explain the basis of their calculation, the financial mentor referred to the calculation from the Home Economics Survey from Statistics New Zealand and the Otago University School of Nutrition.
The lender relied solely on Statistics New Zealand’s home economics survey and said the survey showed that an adult with three children, living in Sarah’s area, with the same income as Sarah, would spend $ 260 per week in food. The lender then explained that he had reduced the $ 260 by 65% to reflect the fact that Sarah was earning 65% of the national average income, and calculated Sarah’s food allowance at $ 170 per week.
“While we agree that higher income earners are likely to spend more on food, we were of the opinion that Statistics New Zealand data had already taken this into account and the lender had done so. an error in applying the additional 65% discount. Explains Ms. Taylor.
“Using the undiscounted amount of data from Statistics New Zealand, one would expect Sarah to spend $ 260 per week on food and household expenses, more than her financial mentor and the lender calculated.”
FSCL found that the lender made a mistake in calculating whether Sarah could afford the loan and defaulted on her responsible lending obligations by failing to ensure Sarah could repay the loan without experiencing significant hardship. The lender was required to repay all interest and charges added to the loan as a remedy for the breach, amounting to approximately $ 6,500.
After the interest and fees were paid off on Sarah’s loan, Sarah’s outstanding loan balance was fully repaid and she received a repayment of approximately $ 500.
In a similar case, a lender reimbursed fees and interest, which left a single dad with $ 3,000 in credit after FSCL found out the lender overestimated his income and underestimated the costs of food. .
In 2019, Sean, a father of three, borrowed $ 12,000 to buy a car. The loan was approved, but Sean almost immediately defaulted on his repayments.
It was when Sean turned to a financial mentor for help that it became clear that the loan was not initially affordable.
The financial mentor requested a copy of the lender’s affordability assessment and concluded that the lender had made a mistake. The lender maintained that he correctly assessed Sean’s claim, so the financial mentor filed a complaint with FSCL on Sean’s behalf.
When FSCL reviewed the information, it appeared that the lender had included a disability allowance in Sean’s income, but the corresponding expenses that this was supposed to cover had not been taken into account. As in Sarah’s case, FSCL was also concerned that the lender had underestimated Sean’s food allowance in the budget.
Although the lender did not accept that his loan was irresponsible under the Credit Contracts and Consumer Finance Act 2003, he was ready to reconsider his position and agreed to reimburse the fees and interest accrued on Sean’s loan.
You can find both case notes here
FSCL is an independent, not-for-profit, external dispute resolution system that provides dispute resolution services to participating financial service providers and their clients. The FSCL process focuses on the resolution of complaints through conciliation and assisted negotiation and is also able to take formal decisions that are binding on financial service providers. The FSCL process is free for consumers. For a list of FSCL participants and more information about the FSCL visit
. You can learn more about dispute resolution mechanisms in New Zealand by watching the following video: https://www.youtube.com/watch?v=KPQN_ajedxA
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