In August 2016 Terry borrowed $9,500 from a finance company to buy a car. He agreed to repay the loan at $90 a week over two and a half years. Terry gave the finance company his car as security for the loan.
By October 2016 Terry’s loan was in arrears. Over the subsequent months Terry made frequent promises to pay that were broken. The loan was incurring default interest, fees and charges. The car was repossessed and returned to Terry twice, adding further costs to the loan.
Terry went to a community law centre and a financial mentor who both told him that the finance company had made mistakes with the interest and fees added to the loan. Terry complained to the finance company, but the finance company told him their records were accurate.
In March 2020 the finance company repossessed Terry’s car for the final time. Terry gave up and told the finance company they could sell his car. The finance company sold the car for $4,300 and told Terry that he still owed $4,344.
But when the finance company told Terry he still owed $4,344, Terry complained to FSCL. Terry said that he had borrowed $9,500 in 2016 and now, in 2020, he still owed about $9,000. Terry could not understand how, after making payments for four years he was no further ahead with the loan.
We referred the complaint to the finance company’s internal complaints process. To bring the complaint to a swift conclusion, the finance company offered to write off the residual debt of $4,344.
Terry did not accept the settlement offered.
Terry acknowledged that he missed some payments but said he had always done his best to catch up. Terry had showed his account records to a community lawyer and a financial mentor, who both said that the finance company appeared to have charged him a lot of fees. Terry wanted someone independent to look at his account statements and tell him whether the finance company had acted correctly. If we agreed that the finance company’s offer was reasonable, Terry said he would accept it.
The finance company stood by the accuracy of their records saying that they only ever wanted to help Terry. The finance company were confident their original decision to lend was responsible. Finally, the finance company said that they had sold the repossessed car to themselves for $4,300 to maximise the return for Terry. If the car had been auctioned at an independent auction house, the car would almost certainly have sold for less, leaving Terry with an even bigger debt.
We reviewed the events leading to the sale of Terry’s car from the very beginning, when he applied for the loan. It was our view that the loan should not have been approved in the first place. The finance company had not met its responsible lending obligations under the Credit Contracts and Consumer Finance Act (CCCFA) because the information available showed Terry could not afford the payments:
- the loan application showed that Terry’s family included his partner and two children, but allowed only $320 a month for food for all of them
- the application showed income of $2,700 a month, but the bank statements and pay slips showed income of $2,400 a month
- the application form showed a rent expense of $700 a month, because Terry’s brother was living with the family and contributing to rent, but the bank statements showed no contribution from Terry’s brother and rent payments of $1,840 per month.
After deducting the rent from the income, Terry was left with only $560 a month to cover all the living costs for him and his family, without taking into consideration the loan repayments of $360. We found the loan was unaffordable for Terry from the start, and should not have been approved.
Under section 89(1)(aaa) of the Credit Contract Legislation Amendment Act 2019 the remedy for irresponsible lending is to require the borrower to repay the principal sum borrowed, but for the lender to forgo all interest and fees charged. It was our view that this was an appropriate resolution in Terry’s case. However, we thought it fair to allow the finance company to recover some costs it had spent on repairing and registering the car, because these costs were a benefit to Terry. We also added back the sale price of the car. On this basis, we calculated the compensation to be about $8,000.
We also looked at the management of the account. Over the life of the loan the finance company had issued 20 repossession warning notices and eight authorities to repossess, or one notice every two months, charging Terry $25 for each repossession warning notice and $50 for each authority to act.
We suggested to the finance company that this could be considered a breach of section 9 of the Fair Trading Act 1986 because they were saying they would take steps to recover a debt when there was no intention to do so. We were concerned that the finance company’s actions had allowed Terry’s debt to continue growing.
We were also concerned that the finance company appeared to be misusing the repossession ‘at risk’ provisions in the CCCFA. A car will only be ‘at risk’ if the finance company believes, on reasonable grounds, that the car has been, or will be, “destroyed, damaged, endangered, disassembled, removed, concealed, sold, or otherwise disposed of”.
The finance company said it had repossessed Terry’s car because the loan was in default and/or the insurance and registration had lapsed. However, the definition of ‘at risk’ in the CCCFA implies an immediate risk to the goods. This was not the case in Terry’s case, and we found that the finance company had not followed the correct repossession process on two occasions.
We drew the finance company’s attention to our concerns about the sale process, when the car was finally repossessed and sold in 2020. Under section 83Yof the CCCFA the finance company should have offered the car for sale. Instead the finance company sold the car to themselves. We did not see how this process could satisfy the finance company’s obligation under section 83Z of the CCCFA to follow a commercially reasonable sale process and demonstrate that they took reasonable care to obtain the best price reasonably obtainable at the time of sale.
Finally, we advised the finance company that under both the Responsible Lending Code and our terms of reference, the lender is obliged to have an internal complaints process and refer unresolved complaints to FSCL. Although we were mentioned, but not named, in one letter to Terry, the finance company’s process fell short of is expected in a compliant internal complaints process.
Although Terry accepted our decision, the finance company continued to maintain that they had acted appropriately throughout their dealings with Terry. The finance company said they based their decision to lend on the information Terry had disclosed in the application and that after Terry defaulted on the loan, they did everything they could to help him keep the car.
The finance company reluctantly agreed to pay Terry the recommended compensation of about $8,000.
Insights for consumers
While many lenders work hard to meet their legal obligations, there are still some lenders operating with little regard for responsible lending and the CCCFA. If you think something looks unfair, please contact our team. We will tell you if we think your lender has acted correctly, but if we can see evidence that the lender has breached their legal obligations, we can require the lender to pay you compensation.