70 Year Old Given Unaffordable Loan

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.

A recent investigation by the IFSO Scheme found that a lender failed to make sufficient inquiries before approving a $35,000 loan to a 70-year-old borrower, leading to financial hardship. As a result, the lender agreed to waive over $5,000 in charges and allowed repayment on an interest-free basis.

In May 2022, David*, aged 70, took out a $35,000 personal loan to fund his daughter’s home renovations. The loan had a 19.99% interest rate, requiring monthly repayments of $935.13 over 60 months. The total amount repayable was $56,107.80, including $20,867.80 in interest.

However, David experienced financial hardship after losing his job and becoming a caregiver for his unwell wife. Struggling to keep up with repayments, he made a complaint about the lender to the IFSO Scheme, saying he shouldn’t have been given the loan in the first place.

Karen Stevens, Insurance & Financial Services Ombudsman, says that responsible lending is a common issue in the credit complaints we receive. “Under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) and Responsible Lending Code, lenders are required by law to ensure a loan is affordable and suitable by making reasonable inquiries to ensure the borrower can repay it, without suffering substantial hardship. We looked at whether David’s lender had done this before giving him the loan,” she says.

While the lender had reviewed David’s payslips before approving the loan, there was no evidence of other inquiries, such as his intended work hours over the 5-year loan term, given his age, or the fact that he was obtaining a loan for someone else. His payslips also showed he used sick or annual leave on a regular basis.

The lender argued that it could not consider David’s age due to the Human Rights Act. However, the IFSO Scheme said that the Responsible Lending Code required an individualised assessment of David’s circumstances.

“We concluded that the lender should have made further inquiries given David’s age, work hours, and loan purpose and, therefore, it had not met its obligations under the CCCFA,” says Stevens.

To resolve the complaint, the lender agreed to waive $5,062.09 from the loan balance and allowed David to repay the loan with zero interest. As the lender’s offer was slightly more than the total interest and fees that had become payable under the loan—the required remedy under the CCCFA—the complaint was resolved.

Stevens says that it’s crucial that lenders conduct sufficient inquiries and meet their responsible lending obligations.

“This case shows the need for lenders to conduct comprehensive affordability assessments, especially when borrowers are older, or obtaining loans for someone else’s benefit. If a lender fails to do this, they can be required to refund the consumer the interest and fees, which is what happened in David’s case,” she says.

The IFSO Scheme encourages consumers who believe they have been given an unaffordable loan to seek assistance from financial mentors and, if necessary, make a complaint if the matter is not resolved to their satisfaction.

*name has been changed.

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