Responsible lending and repossession woes

In December 2017 Deena needed a new car. Deena traded in her Toyota Corolla at a local car yard for $4,000 and then arranged finance for a new car through the lender. The lender charged an establishment fee of $500 making the total loan balance $9,490.

The balance of Deena’s loan was secured against her new vehicle and she was to repay the loan and interest at weekly instalments of $75 over a four-year term.

Within a few months, Deena ran into difficulty in meeting her repayments

Deena contacted the lender, who agreed to a financial hardship arrangement, and her payments were reduced to $25 per week. After making only one hardship payment, Deena defaulted.

The lender decided to repossess the car. However, the lender could not locate the car. 

Deena refused to voluntarily surrender the car and would only do so if the lender unwound the loan and either gave her back her old car, or refunded her the $4000 trade in cash contribution she had paid. The lender did not agree.

Deena complained to FSCL.

 

Dispute

Deena argued that she never should have been given a $12,000 loan for the car as she could never afford it. The lender argued it relied on the information provided by the dealer, during the loan application process,  that Deena could afford the loan.

 

Review

We reviewed the documents sent by the lender including:

  • a pay slip showing a very low weekly income
  • a tax summary stating Deena earned less that $25,000 for the previous year, and
  • a statement of financial position filled in by the dealer which said Deena earned over $1,000 per week,

which confirmed Deena should not have been loaned the funds to pay for the vehicle:

Under the Credit Contracts and Consumer Finance Act (CCCFA) a lender is required to satisfy itself that a borrower can afford to borrow money without suffering substantial hardship. The lender is also required  to make reasonable enquiries into the reliability of the information supplied by the borrower. In this case, the lender had not made reasonable enquiries and could not verify any of the information Deena used to make her application. The lender had likely breached the responsible lending code.

Despite this, because Deena was in breach of her loan agreement, we found it likely that any repossession action was justified. 

As the lender had breached their obligations under the CCCFA, we required them to write off all interest and fees charged on the loan.

The original amount which Deena borrowed from the lender was $9,490. After removing interest and fees, the final balance was reduced to $7,855.66.

We also found that the car should then be surrendered to the lender and sold. The proceeds from the sale would further reduce the amount Deena was required to pay back.

 

Resolution

The lender agreed with our settlement option and credited all the interest fees to Deena’s loan account, reducing the final balance to $7855.66. The lender could not repay Deena her $4,000 cash contribution to the car’s purchase price as that money had been paid to the car dealer, not the lender.

Eventually, Deena was able to secure a loan with another company to pay the $7,855.66 to the lender and the complaint was settled.

 

Insights for consumers

Lenders are required to make reasonable enquiries to satisfy themselves that your loan application details are correct. Before buying a car on finance, you should fill in your own application rather than relying on another person or the dealer.  If another person fills in the loan application for you, make sure the information on the application is correct.

Lenders secure car loans against the vehicle itself. In the situation they have not lent responsibly, that does not mean they are not entitled to repossess the vehicle. If you are having difficulties paying your loan, talk to your lender and reach a practical solution before you get into arrears. If it is found that a lender did not lend responsibly, we are unable to wind back the loan completely, we can only require a lender to write off interest and fees.

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