In 2012 Wendy got a $4,000 loan from a finance company. The loan was secured by her car and her house. Wendy’s son, Luke, also had a loan from the same company.
Two years later, Luke’s loan of about $4,000 was in arrears. Nevertheless, the finance company agreed to refinance his loan and advance him an additional $1,000. Wendy signed a guarantee for Luke’s new loan and gave her house as security. At the time, Wendy’s own loan was in arrears.
Less than a month after receiving the $1,000, Luke defaulted on his new loan and Wendy was called upon to meet his repayments. In June 2015 the finance company transferred Luke’s loan balance to Wendy’s loan account as a ‘top-up’, taking her balance from $5,635.12 to $13,877.24.
In November 2016 Wendy’s budget adviser contacted FSCL claiming Wendy had been treated unfairly by the finance company. The budget adviser was particularly concerned about the top-up, as prior to this, Wendy had struggled to meet repayments and her own loan account was in arrears. The budget adviser considered the finance company had breached its responsible lending obligations. The budget adviser said that Wendy had believed the finance company would take her house if she had not agreed to Luke’s loan balance being transferred to her own loan account.
The finance company said that Wendy had asked for the loans to be combined. It said it had no record of Wendy being advised that if she did not combine the two loans she would risk losing her house. The finance company provided us with a change disclosure statement which had been signed by Wendy. It said a broker had assisted Wendy with the top-up and the broker had explained to Wendy that once the two loans were combined she would only have to make one repayment.
We found two key issues: the finance company’s acceptance of Wendy as a guarantor for Luke’s new loan and the top-up transferring Luke’s loan balance to Wendy’s loan account.
In our view, the finance company engaged in unconscionable conduct when it accepted Wendy as a guarantor for Luke’s new loan. To meet the legal threshold for unconscionability, we needed to be satisfied that:
· Wendy was in a position of significant disadvantage and was unable to look after her own interests, and
· the finance company knew, or ought to have known, of this significant disadvantage and took advantage of this.
There is no strict definition of significant disadvantage. However, at the time she signed the guarantee, Wendy had:
· little to no financial capability
· struggled to meet her loan repayments since receiving the loan in 2012
· received no financial benefit from assisting her son to borrow a further $1,000
· put her home (and only significant asset) at risk
· agreed to a repayment obligation she would be unable to meet
· received no legal advice
· not understood what she was signing or the potential consequences.
Given these factors, we were satisfied that Wendy was in a position of significant disadvantage when she guaranteed Luke’s loan.
We also found that the finance company knowingly took advantage of Wendy’s position. When it accepted Wendy’s guarantee, it knew her loan had largely been in default. We considered that the finance company was also aware, from Luke’s repayment history, that he was unlikely to meet repayments for his new loan. The notes for Wendy’s loan account showed that, prior to Luke’s loan being refinanced, she had been making repayments towards his first loan.
Luke’s loan went into arrears one week after he received the $1,000. The account statement showed that Luke had made four repayments towards his new loan and that Wendy was called upon to meet his repayments within two months of the top-up being advanced.
There were other circumstances that supported our finding that the finance company’s behaviour was unconscionable. While Wendy received no benefit from guaranteeing Luke’s new loan, the finance company did. Wendy’s house was taken as security, which suggested that, previously, Luke’s initial loan was either unsecured or the security was inadequate. By refinancing Luke’s loan, the finance company benefitted by exchanging a high risk, unsecured loan for a loan that was secured and guaranteed.
The guarantee forms Wendy signed stated: “You are advised to obtain independent legal advice before signing this guarantee.” However, there was no evidence to suggest the finance company had spoken to Wendy about this. In our view, the finance company should have strongly urged Wendy to obtain legal advice before it accepted the guarantee. We also found the finance company was indifferent to the fact that it was placing Wendy at risk of losing her home when it accepted her as guarantor for Luke’s new loan.
The balance of Luke’s loan transferred to Wendy’s account was $5,808.28. Fees and charges were also added including a $390 establishment fee, a $395 brokerage fee and a $1,623 up-front premium for loan protection insurance. In total, Wendy’s loan increased by $8,216.28.
Although the finance company said Wendy had asked for Luke’s loan balance to be transferred to her own loan, we were not satisfied that Wendy understood the effect the top-up would have, or the additional fees and charges that had been added to her account.
The finance company said it had no record of telling Wendy she could lose her house if the two loans were not combined. However, there was a note on the finance company’s file which read: “Her son reneged on payments, we started considering legal action against the property. We then agreed to combine the two loans to make it more affordable for her to maintain payments.”
We accepted that Wendy genuinely believed she could lose her house if the two loans were not combined. Further, combining the two loans did not make it more affordable for Wendy. Prior to the top-up, the total fortnightly repayments for Wendy’s and Luke’s loans was $185.64. After, the total fortnightly amount due was $202.25.
Responsible lending principles
The top-up variation occurred after the amendments to the Credit Contract and Consumer Finance Act 2003 came into force. Therefore the Act’s responsible lending principles applied.
The finance company was obliged to help Wendy make an informed decision about the top-up. Apart from the signed disclosure statement, there was no evidence that either the finance company or the broker took any steps to assist Wendy in making an informed decision.
The responsible lending principles also apply to the sale of credit-related insurance. In our view, the finance company made no enquiries as to whether:
· the loan protection insurance met Wendy’s objectives or requirements
· Wendy understood what the insurance policy covered
· Wendy could afford to pay the premium.
If Wendy was unable to afford her loan repayments before the top-up, it seemed unlikely she would be able to afford to pay $1,623 for loan protection insurance. In Wendy’s circumstances, it was inappropriate for the finance company to sell and finance this insurance.
Between the top-up in June 2015 and January 2017, Wendy paid the finance company $8,292.74. However, her loan balance only decreased by $235.16 during this same period. Wendy’s loan had essentially remained at a standstill for eighteen months.
In our view, the finance company had placed Wendy in an impossible position. Despite making regular repayments, Wendy was unable to pay enough to catch up the arrears, meaning default interest and fees continued to accrue on her account. We considered that a fair outcome would be to put Wendy back in the position she would have been in had the finance company not accepted the guarantee. We asked the finance company to calculate the amount Wendy would still owe on her own 2012 loan had Luke’s loan balance not been added to her loan account.
The finance company showed that, had the top-up not occurred, Wendy would still owe $1,489.69. It agreed to release Wendy from her guarantee and to fix the balance of the loan at $1,489.69. Wendy accepted the offer and agreed to continue to make fortnightly repayments until this amount was paid.