Lender breaches responsible lending obligations
Pete made a complaint to the IFSO Scheme, saying that the credit limit increases he was given were unaffordable.
Pete made a complaint to the IFSO Scheme, saying that the credit limit increases he was given were unaffordable.
The Insurance & Financial Services Ombudsman Scheme (IFSO Scheme) received nearly 5,000 complaints last year, mainly about insurance products. However, the IFSO Scheme also receives numerous complaints about credit and lending. Many of those come from people unhappy with how their lenders have handled the loan process, saying their loan should never have been made.
In April 2013, Pete* arranged a credit card with a $3,000 credit limit. Between November 2013 and October 2017, he applied for 11 credit limit increases. By October 2017, his credit limit had risen to $17,300.
In 2022, Pete made a complaint to the IFSO Scheme, saying that by 2016, he was no longer employed, making the credit limit increases unaffordable. He said that the lender had not conducted proper financial checks before approving the increases. Pete said that he had used the money as he was in desperate hardship, but he was unable to keep up with the repayments.
The lender said that Pete had not informed them of his unemployment and believed it had met its obligations. However, to resolve the complaint, the lender initially offered to block the credit card and place the remaining balance on interest-free terms for 36 months. Pete rejected this offer.
The IFSO Scheme investigated.
At the time that Pete applied for his credit card in 2013, the Credit Contracts and Consumer Finance Act 2003 (CCCFA) did not contain the responsible lending principles. These came into effect from June 2015. Therefore, the lender did not have to do an affordability assessment in 2013. However, for the increases starting in November 2015, the CCCFA required a creditor to “make reasonable inquiries, before entering into the agreement, so as to be satisfied that it is likely that … the borrower will make the payments under the agreement without suffering substantial hardship”.
There were 5 credit limit increases from November 2015, eventually increasing the credit from $10,500 to $17,300, and the affordability assessments were based on the original application information.
For the 3 final credit limit increases in December 2016, July 2017, and October 2017—which occurred when Pete was unemployed—the lender required only that Pete tick a declaration box confirming his ability to meet minimum repayments. No further inquiries were made regarding his income or expenses. Pete was not asked any specific questions about his financial position, or whether it had changed.
This did not meet the lender’s statutory obligations to make sufficient inquiries to ensure the borrower can repay the debt without suffering substantial hardship. As a result, the lender was found to have breached section 9C of the CCCFA for each credit limit increase from December 2016 onwards.
Given the amount of interest charged since 2016, the lender agreed to wipe the outstanding balance on the credit card and permanently cancel the credit card.
Lenders must undertake proper affordability assessments before increasing credit limits. Responsible lending principles exist to protect borrowers from financial hardship, and it is important that lenders assess a customer’s ability to repay a loan before extending further credit.
*Name has been changed