IFSO reports surge in complaints on credit practices
Last year, the Insurance & Financial Services Ombudsman Scheme (IFSO Scheme) handled nearly 5,000 complaints, predominantly related to insurance products.
However, a significant number of grievances also emerged regarding credit and lending practices. Many of these complaints stemmed from borrowers who felt that their loans were inappropriately granted.
Echoing these concerns, Centrix’s recent report revealed a worrying 16% year-on-year increase in financial hardship cases, despite an encouraging month-on-month decrease of 11,000 consumers in arrears.
A loan leads to hardship
Among the cases was that of David*, a 70-year-old who found himself in dire financial straits after accepting a $35,000 loan, IFSO reported.
Initially intended to fund his daughter’s home renovations, the loan came with a steep 19.99% interest rate, resulting in monthly repayments of $935.13 over five years, totaling $56,107.80 with interest.
David’s financial situation deteriorated after he lost his job and became the primary caregiver for his ill wife.
Unable to meet the loan repayments, David contested the loan’s legitimacy with the IFSO Scheme, arguing that it should not have been approved.
Inquiry into lender’s practices
Karen Stevens (pictured), insurance and financial services ombudsman, said that responsible lending is a recurring theme in credit-related complaints.
“Under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) and Responsible Lending Code, lenders are legally obliged to ensure loans are affordable and suitable by conducting thorough inquiries,” Stevens said.
The investigation revealed that while the lender had checked David’s payslips, it had not sufficiently explored his long-term financial stability, considering his age and the fact that the loan was for another person’s benefit.
There was no evidence of inquiries into his expected work hours over the loan term or other relevant factors.
Resolution and lessons learned
The lender, acknowledging its oversight, agreed to waive $5,062.09 in charges and converted the remaining loan balance to an interest-free repayment plan.
This resolution not only alleviated David’s financial burden but also surpassed the remedies typically required under the CCCFA.
“This case underscores the importance of lenders performing detailed affordability assessments, particularly for older borrowers or those acquiring loans for third-party benefits,” Stevens said.
She stressed that failing to conduct such assessments could compel lenders to refund interest and fees, as occurred in David’s situation.
Consumer advice
The IFSO Scheme advises consumers who suspect they have received an unaffordable loan to consult financial mentors and consider lodging a complaint if their concerns are not adequately addressed by their lender.
This situation serves as a critical reminder of the need for rigorous and thoughtful lending practices to prevent financial harm and ensure compliance with established consumer protection laws.
*Name has been changed to protect privacy.
