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Co-borrowing Putting Vulnerable Consumers At Risk

As the financial services industry gears up for the implementation of more stringent legislation around responsible lending from December, Financial Services Complaints Limited (FSCL) has seen an increase in cases where consumers are finding themselves liable for debt, they did not fully understand they were signing up for.

FSCL, a dispute resolution service approved under the Financial Service Providers (Registration and Dispute Resolution) Act 2008, released its annual report today, highlighting an increase in complaint numbers from 768 in the previous reporting year, to 931 in the year ending 30 June 2021.

Consumer credit complaints accounted for the second largest number of product complaints investigated by FSCL during that period, with an average of at least four cases around consumer credit products formally being investigated every month. In some of these investigations, consumers contacted FSCL after they realised that they had been joined as a co-borrower, rather than a guarantor on a loan.

In one example, a case study in the report shows how a mother almost had her car repossessed after her daughter defaulted on a loan.

Sandra’s daughter Emily needed to buy a car. When she applied for the loan, the company she was dealing with asked Sandra if she would guarantee Emily’s loan and give her car as additional security.

Sandra agreed and the finance company sent a staff member to Sandra’s work with the loan documents. Sandra signed the loan documents, the loan was approved, and Emily bought the car.

Emily’s loan repayments were unreliable, and within a couple of months she was missing more payments than she was making. The finance company issued a repossession warning notice on Sandra, wanting to repossess Sandra’s car. Sandra objected to the repossession warning notice and complained to FSCL.

Following an investigation, FSCL was satisfied Sandra had understood she was agreeing to guarantee Emily’s loan. However, it was apparent that Sandra was recorded as a co-borrower and not a guarantor as she had believed. It was FSCL’s view that the finance company had not complied with their responsible lending obligations. Not only had they failed to assess Sandra’s ability to repay the loan without suffering substantial hardship, but they had not given her a copy of the loan agreement and had not advised her to seek legal or independent advice before agreeing to guarantee the loan.

In another case, the situation was similar to Sandra’s, where a father paid over $5000 of his daughter’s debt, after she fraudulently listed him as a co-borrower for her loan.

“In a number of cases, it has appeared that the lender asked the family member to be a co-borrower, rather than a guarantor, in order to avoid the additional responsibilities a lender owes to guarantors,” explains FSCL Chief Executive Officer, Susan Taylor, “for example, the requirement to recommend a guarantor obtains independent advice before signing a guarantee”.

Cathy Roche, a budget adviser based in Christchurch agrees, adding that many consumers do not fully understand the obligations and potential consequences when agreeing to guarantee or be listed as a co-borrower on a loan.

In one case, a single mother who unwittingly became a co-borrower was unable to buy food for her children after the court, following an application from the lender, placed an attachment order on her benefit payment. Her former partner, who she was with at the time the loan had been advanced, had left her, leaving her liable for the debt.

“It may seem straight forward when everything is going well, but you have to ask yourself if for whatever reason you were left on your own, how would you repay this loan? Are you happy with the decision?” Cathy explains.

“There are some questions you need to ask yourself before you sign. You need to understand what it means if your car is being used as security. Go through the clauses in the contract, speak to a budget adviser, or ask someone for advice. It is important to fully understand your commitment.”

Ms Taylor says that dispute resolution services have an important role to play in assisting vulnerable consumers.

The organisation is also committed to supporting its scheme members as they come to grips with their new obligations. ‘’While many lenders comply fully with their responsible lending obligations, occasionally mistakes can be made’’.

“We remain committed to helping raise standards in the financial services industry by sharing our expertise and supporting our members through the substantive legislative changes that came into effect this year” Ms Taylor says.

FSCL’s Annual report ’2020/2021 (including the case study) is available on its website at

You can watch a video on the role of dispute resolution schemes in New Zealand here.

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