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Commission warning on responsible lending requirements


The Commerce Commission has issued a warning to Rapid Loans NZ Limited (Rapid Loans) about a loan it issued to a vulnerable borrower.

The Commission has warned Rapid Loans that it is likely to have failed to comply with the lender responsibility principles set out in the Credit Contracts and Consumer Finance Act 2003 (CCCFA).

In the Commission’s view, Rapid Loans failed to make reasonable inquiries into the borrower’s income and expenses and could not be reasonably satisfied that the borrower could afford the payments on the loan without suffering substantial hardship.

“The CCCFA is clear that lenders must comply with the lender responsibility principles. In this case, we think Rapid Loans failed to do so and that this was not responsible lending,” said Commissioner Anna Rawlings.

The Commission received a complaint from a budget advisor that a borrower had suffered substantial hardship as a result of making payments on a Rapid Loans agreement.

The Commission’s investigation showed that the borrower had borrowed to meet repayment obligations on existing loans from Rapid Loans. Rapid Loans advanced her $1,850 in April, she defaulted on that and Rapid Loans advanced her a further $2,500 in September 2016. On both occasions the borrower was also at her overdraft limit. She defaulted on the second loan within a few weeks.

“We consider that Rapid Loans failed to make inquiries about the borrower’s circumstances and it incorrectly assessed her income and expenses. For example it made no allowance for the borrower’s rent or power, and it treated cash withdrawals as discretionary spending, when there was no reasonable basis on which to do so,” said Ms Rawlings.

“In our view the borrower was likely to be vulnerable because of her existing levels of debt and that, because of this, Rapid Loans should have made more extensive inquiries to be reasonably satisfied that she could afford the loan."

Rapid Loans advised the Commission it had revised its processes for affordability assessments and made significant investment into its own software, allowing it to capture more data.

“Responsible lending is one of our focus areas for 2018/19. We continue to see lenders failing to comply with the responsible lending principles, putting many borrowers at risk of hardship. We urge lenders to make sure that they understand their responsible lending obligations and their internal processes are designed to ensure that they meet their obligations,” said Ms Rawlings.

Background
Lender Responsibility Principles
Lenders entering into consumer credit contracts after 6 June 2015 are required to comply with the lender responsibility principles, as set out in the CCCFA.

These include that lenders must make reasonable inquiries, before entering the agreement, to be satisfied it is likely the borrower will make repayments without suffering substantial hardship.

Responsible Lending Code
The Code provides guidance as to how lenders can comply with the Principles. It includes the type of inquiries a lender should make into a borrower’s income and expenses, and it specifies that more extensive inquiries should be made if the borrower is vulnerable.

It treats a borrower as vulnerable where the lender knows (or the circumstances are such that a lender ought to know) an individual appears to be under significant pressure to obtain credit.

The Code is not legally binding, but if lenders comply with it that will be treated as evidence they complied with the principles.

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