Loto and Masina applied for a loan so that Loto could buy a car costing $12,000 to become an Uber driver. Loto did not have a reliable employment history, but Masina had been working as a cleaner for the same company for six years so the lender based the lending application on her income alone. Loto and Masina live with Masina’s brother who only charged them $50 a week for all-inclusive board.
The lender was satisfied that, on Masina’s income alone, Loto and Masina could afford the loan repayments of $113 a week for three years. Loto and Masina signed 35 pages of documentation, borrowing $15,250 from the lender. The loan included nearly credit related insurance at a cost of nearly $3,000.
Loto and Masina made all the payments for the first four months. Loto then called the lender to say that he was going to Samoa for a couple of months and that Masina would continue to pay the loan. Unfortunately, Masina could not afford the payments and the loan fell into default. The lender issued a repossession warning notice and then repossessed the car.
When Loto got back he contacted the lender and asked for the car back. The lender said they would return the car if Loto paid $1,100 in arrears and repossession costs. Loto paid the $1,100 and the car was returned.
All went well until, about nine months later, Loto went back to Samoa. Once again, the payments stopped and the car was repossessed and sold, leaving Loto and Masina with a debt of about $9,000. Loto and Masina started repaying the residual debt but after a few months they went to a community law centre for advice.
The community law centre wrote a letter to FSCL on Loto and Masina’s behalf, explaining that English is their second language and that they had not understood the expenses that had been added to the loan balance. The community law centre then stepped aside and a friend of the family, Talia, offered to help Loto and Masina find out why they still owed so much money. Loto and Masina authorised Talia to manage the complaint on their behalf.
Dispute
Talia explained that Loto and Masina thought they were borrowing $12,000, plus interest, from the lender. Loto and Masina had paid the lender about $12,000 and could not understand how they could still owe nearly $5,000. Loto and Masina knew they would need to pay more than $12,000 back but they wanted us to check that they were paying the right amount.
The lender said that Loto and Masina had signed all the documents agreeing to repay the $15,250 loan over three years at $113 a week. Loto and Masina had broken this agreement, incurring default fees, interest, and repossession costs. The lender was confident that the loan application process complied with their responsible lending obligations.
We could see that the lender had added nearly $3,000 in credited related insurance premiums to the loan balance, so we asked the lender for more information about the insurance sales process. The lender said that they train their dealers to ensure the products will meet the borrower’s needs, but the lender was unable to show us any information about the advice given to Loto and Masina.
Review
While we had some concerns about the loan affordability, Talia agreed that the information Loto and Masina had given about their income and expenses was correct. Talia explained that Masina’s brother wanted to help them get ahead so was only charging them $50 a week in board. Masina’s bank statements for the last three months were stable and showed a positive balance.
We explained to Loto and Masina that the lender’s calculations were correct. Although the car cost $12,000 they actually borrowed $15,250, once insurance and other costs were added to the loan.
However, we were concerned that, as speakers of English as a second language, Loto and Masina were vulnerable borrowers. When the car was repossessed Loto had asked to speak to a Samoan speaker and, when we listened to a telephone recording of Loto speaking to the lender on another occasion, it was clear to us that language was a barrier to understanding. We also took into consideration the statement from the community law centre.
Under section 9C(3)(b) of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) the lender is obliged to help Loto and Masina make an informed decision about whether or not to enter the loan agreement and clause 7.11(a) of the Responsible Lending Code (the Code) explicitly states that a lender’s duty to vulnerable borrowers is greater.
Although the information presented to Loto and Masina was well written and easy to understand, we considered that 35 pages of documentation for speakers of English as a second language would be daunting, particularly as they may not have understood that they could take the documents away to read.
We then turned our attention to section 9C(5) of the CCCFA, which obliges the lender to make reasonable enquiries to ensure that the insurance will meet the borrower’s needs and that they can afford the insurance. The lender was unable to give us any evidence that they had met their obligations with respect to Loto and Masina. We felt it was possible that if Loto and Masina were properly informed about, say, the redundancy insurance they may have decided to run the risk of redundancy and save the $600. The insurance costs seemed expensive for the cover that Loto and Masina received.
We initially suggested that a reasonable resolution would be for the lender to write off the residual debt.
The lender maintained that they had followed a reasonable insurance application process, but in the interests of resolving the complaint they were prepared to refund all the insurance costs, plus interest, leaving a residual debt of $800.
Resolution
Given our view that, based on the information available to the lender, the original decision to lend was reasonable, we recommended that Loto and Masina accept the offer to reduce the debt from what was now $5,000 to $800. Loto and Masina accepted our decision and the complaint was settled on this basis.
Insights for participants
Section 9C(5) of the CCCFA changes the lender’s obligations with respect to the advice given around credit related insurance. It is no longer enough for a lender to give generic advice and, almost automatically, include insurance as part of the loan package. We urge lenders to look closely at their process in the context of both the CCCFA and the Responsible Lending Code.
