A beneficiary who took out a $14,500 loan for a car could be left without the vehicle and owing $8000, despite having already repaid more than $9000.
Financial mentor Rod Lee said the case was a typical example of “unaffordable and oppressive” lending commonly encountered by those in his industry.
In a submission on proposed changes to consumer lending laws, Lee said while the intent of current rules was “excellent”, not all lenders followed them and those who didn’t often faced few or no consequences.
The Government has proposed several amendments to the Credit Contracts and Consumer Finance Act (CCCFA) which came into force last December and the Responsible Lending Code.
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In its original form, the CCCFA forced banks to take a forensic approach to consumer lending, locking many potential borrowers out and creating a mess for the banks.
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Some of the most controversial aspects of the tougher laws have already been removed, including borrowers being asked about their current living expenses based on recent bank transactions, and consultation has recently closed on a further set of changes.
In his submission, Lee said the intent of the CCCFA was excellent and supported by the Responsible Lending Code.
However, there was a very big ‘but’ to that observation, in that not enough attention had been given to consequences for lenders who breached the act, he said.
That meant unaffordable and oppressive lending was a common occurrence, especially for low-income borrowers, and particularly prevalent in vehicle finance contracts, he said.
In the case of the beneficiary borrower, their intention had been to spend $3000 to $5000 on a vehicle.
Knowing they had a poor credit rating, they were referred by a friend to a car yard with a reputation for arranging finance for people with low credit scores.
At the yard, the salesperson talked the buyer out of the low-cost vehicle, saying it would be unreliable, expensive to maintain and had poor fuel efficiency.
“[They] assured the buyer they could easily afford one of two other options and that financing it would not be an issue and no deposit would be needed.
“However, at this stage, that assumption by the car salesperson is just that, an assumption, as no detailed check of bank statements et cetera to confirm income and existing debt commitments had been undertaken.”
The buyer eventually chose an $11,500 vehicle, with a total purchase price of $14,250 including fees and “add-ons.” An interest rate of 29.95% was applied to the total amount, with loan repayments of $134 a week.
Comprehensive car insurance, required as a condition of the loan, was also arranged at $16.81 a week, taking total weekly outgoings to $150.81.
As a solo parent beneficiary, the buyer had net weekly benefit income of $764.98 and owed about $12,000 to the Ministry of Social Development for benefit advances.
According to Inland Revenue’s Household Expenditure Guide, the basic weekly living budget for a solo parent with two young children is $523.80. With the addition of rent – $460 a week, in this case – the buyer’s weekly expenses were $983.80.
“Clearly this loan was demonstrably unaffordable from the start,” Lee said.
The borrower applied for hardship relief 11 months after the loan was taken out and was set a reduced repayment rate of $65 a week for a limited period.
The reduced amount did not include the required insurance premium, interest or fees for the loan.
“In other words, the loan balance was increasing during the hardship period,” Lee said.
The borrower was unable to meet their hardship repayment obligation and sought assistance from a financial mentor.
“The lender was challenged over the affordability issue and denied any fault. The matter was referred to the Disputes Resolution Service who in this instance inexplicably sided with the lender.”
That left the borrower with two options. The first would be to return the car for sale by the lender at its wholesale value, estimated to be $3500.
With that amount offset against the loan balance, the borrower would still have a significant “overhang” debt to repay at 29.95%.
The second option would be to apply for hardship consideration but, having already defaulted on hardship repayments, that option would be disingenuous, Lee said.
“And here is the immediate issue. The lender has clearly breached the CCCFA as the loan was illegal [but] will suffer no penalty for this breach, in fact they continue to profit from the transaction, and the borrower will be left with no car,” he said.
“In this instance, they will have already paid $9214 in repayments and have to continue paying the lender for the overhang debt of the loan, $8154 plus interest and fees.”
While the intent of the CCCFA was clear, the law had provided “absolutely no protection for this vulnerable borrower,” Lee said.
The enforcement details in the act would need significant review to ensure further similar cases were avoided.
“If this does not occur, then the act is meaningless,” he said.
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Lee’s concerns were shared by Fincap, an umbrella organisation supporting 200 budgeting services.
In its submission, chief executive Ruth Smithers said many financial mentors had noted lingering debts following the repossession and sale of a vehicle where a dispute resolution service had found the original lending was unaffordable.
Fincap requested changes to ensure borrowers had all payments returned and no outstanding balance, she said.
“Borrowers should be returned to the position they were in before lending that breached requirements around assessing affordability.”
Lee said the borrower’s case has been taken to the Disputes Tribunal with the hope being that it would be confirmed the loan was unaffordable from the outset and therefore illegal.
“However, we accept that the outcome from the tribunal may not necessarily provide justice for the borrower,” Lee said.
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