Woman Forgoes Food To Pay Car Loan

Two recent cases, investigated by dispute resolution service, Financial Services Complaints Limited (FSCL) have highlighted the need for lenders to make sure that they are realistic about a consumer’s expenses, before approving a loan.

“If a lender makes a mistake in calculating either income or expenses, it may lead to a breach of the Credit Contracts and Consumer Finance Act (CCCFA),” explains FSCL Chief Executive Officer, Susan Taylor.

In a case brought to FSCL recently, it was found that the lender had greatly under-assessed the cost of food and household expenses for a family of four.

Worried that the lender would repossess her car, meaning that she could not take her three children to school and the doctor, solo-mum Sarah borrowed money from family and friends to feed and clothe her children, so she could make sure that she paid her car loan every month.

Battling to stay on top of her finances, it was when Sarah went to see a financial mentor earlier this year that an assessment showed that her budget was about $100 a week in deficit, despite her being able to borrow $12,550 in 2019 to buy a car, with a weekly repayment of $120.

The financial mentor helping Sarah wondered how the lender could have assessed Sarah’s 2019 loan application as affordable and asked the lender for information about the loan application. The lender said that the lending was affordable and there had been no issue, as Sarah had always paid her instalments.

Not satisfied, the financial mentor complained to FSCL on Sarah’s behalf that the lender had not met their responsible lending obligations because they had under-estimated Sarah’s living costs. The financial mentor explained that Sarah had only managed to make her loan repayments by sacrificing other expenses, putting her and her family under considerable stress.

It was found, during FSCL’s investigation, that the biggest discrepancy in the affordability assessment was the amount the lender had allowed for food and household expenses each week. The financial mentor allowed $220 a week, while the lender had allowed $170.

When FSCL asked both parties to explain the basis for their calculation, the financial mentor referred to the Statistics New Zealand Home Economics Survey and the Otago University School of Nutrition’s calculation.

The lender relied solely on the Statistics New Zealand Home Economics Survey and said this survey showed that an adult with three children, living in Sarah’s region, with the same income as Sarah, would spend $260 a week on food. The lender then explained that they discounted the $260 by 65% to reflect the fact that Sarah earned 65% of the national average income, and calculated Sarah’s food allowance as $170 a week.

“While we agree that those on higher incomes will likely spend more on food, it was our view that the Statistics New Zealand data had already taken this into consideration and that the lender had made a mistake when they applied the further 65% discount,” explains Ms Taylor.

“Using the undiscounted amount from the Statistics New Zealand data, Sarah could be expected to spend $260 a week on food and household expenses, more than both her financial mentor and the lender calculated.”

FSCL found that the lender had made a mistake when calculating whether Sarah could afford the loan and had breached their responsible lending obligations by failing to satisfy themselves that Sarah could repay the loan without suffering substantial hardship. The lender was required to refund all the interest and charges added to the loan as the remedy for the breach, amounting to about $6,500.

Once the interest and fees were refunded to Sarah’s loan, Sarah’s outstanding loan balance was fully repaid, and she received a refund of about $500.

In a similar case, a lender refunded fees and interest which left a solo dad with a credit of $3000 after FSCL found that the lender had overestimated income and underestimated food costs.

In 2019, dad of three, Sean, borrowed $12,000 to buy a car. The loan was approved, but Sean almost immediately defaulted on his repayments.

It was when Sean approached a financial mentor for help, that it was apparent the loan was not affordable to begin with.

The financial mentor asked for a copy of the affordability assessment from the lender and concluded that the lender had made a mistake. The lender maintained they had correctly assessed Sean’s application, so the financial mentor made a complaint to FSCL on Sean’s behalf.

When FSCL looked at the information, it seemed that the lender had included a disability allowance in Sean’s income, but the corresponding expenses this was meant to cover hadn’t been taken into consideration. As with Sarah’s case, FSCL was also concerned that the lender had under- estimated Sean’s food allowance in the budget.

Although the lender did not accept that their lending was irresponsible in terms of the Credit Contracts and Consumer Finance Act 2003, they were prepared to review their position and agreed to refunding the fees and interest that had accrued on Sean’s loan.

You can find the two case notes here and here.

About FSCL

FSCL is an independent not-for-profit external dispute resolution scheme which provides dispute resolution services to participating financial service providers and their clients. The FSCL process focuses on resolving complaints through conciliation and assisted negotiation and is also able to make formal determinations which are binding on financial service providers. The FSCL process is free to consumers. For a list of FSCL’s participants and more information on FSCL visit www.fscl.org.nz . You can learn more about dispute resolution schemes in New Zealand by watching the following video: https://www.youtube.com/watch?v=KPQN_ajedxA

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