In February 2017, Anika was visited at home by a mobile trader, which sold consumer goods on credit. Anika purchased a home entertainment system for over $3,000. She signed a loan contract which required her to make weekly payments of $22 towards the purchase price.
After several months, Anika started missing payments. She decided she couldn’t afford the loan and contacted the mobile trader to cancel her contract. The mobile trader told her she could cancel her contract and receive a refund, but she would be charged a $628 cancellation fee.
Dispute
Anika was unhappy with the mobile trader’s cancellation fee, so she went to a financial mentor for advice. The financial mentor told Anika that she could never have afforded the loan, and it was inappropriate for the mobile trader to have granted her the loan in the first place. The financial mentor thought the mobile trader had breached its responsible lending obligations when it decided to grant the loan.
To resolve her complaint, Anika wanted the mobile trader to refund the money she had paid and waive its cancellation fee.
The mobile trader did not think it had breached any responsible lending obligations. It said that it had asked Anika for details of her income and expenses before it granted the loan. The mobile trader then calculated Anika’s budget, and determined she could afford the loan. It took the view that Anika could afford the loan, so it had not done anything wrong when it decided to grant the loan.
Anika’s financial mentor referred a complaint to FSCL on Anika’s behalf.
Review
We found the mobile trader had not met its obligations under the Responsible Lending Code, as it had not made sufficient inquiries into whether Anika could afford the loan. The information provided by Anika raised several red flags which should have prompted the mobile trader to make further inquiries.
The mobile trader’s budget showed Anika received $400 in beneficiary income per week, but paid no rent. There was, however, a note in the budget saying that Anika’s rent was paid by Work and Income New Zealand. Anika told us that while Work and Income did pay her rent, it was deducted from her $400 per week income. The mobile trader’s budget recorded her full $400 income, but didn’t make any deductions for rent.
The budget also failed to include any information about Anika’s dependants. Anika said she had 6 dependant children living with her at the time the loan was granted, but the cost of caring for the children wasn’t factored into her budget.
The mobile trader’s budget also listed Anika’s food expenses as $50 per week, which we did not consider realistic.
After these factors were taken into account, it was clear that Anika could not afford the loan.
Outcome
We wrote to the mobile trader, raising our concerns about their affordability assessment. The mobile trader, in response, offered to waive $324 of its $628 cancellation fee.
Anika accepted the mobile trader’s offer.
Insights for participants
The Responsible Lending Code requires lenders to assess whether a potential borrower can afford a loan. When making this assessment, it will not be enough for a lender to rely on the borrower’s statements about their income and expenses. Lenders need to obtain proof of borrowers’ income and expenses, especially where information provided by the borrower seems suspicious or inaccurate.
