In its decision of 3 June 2016 the Credit and Investments Ombudsman (CIO) found that the financial services provider (FSP) did not comply with its responsible lending obligations and had entered into an unsuitable credit contract with the consumers.

The CIO found that the loan was unsuitable in contravention of section 133 of the National Credit Act as the FSP did not:

• make reasonable inquiries about the consumers’ financial situation in breach of section 130(1)(b),
• take reasonable steps to verify that financial situation in breach of section 130(1)(c), or
• carry out a complete assessment of unsuitability.

Based on the CIO’s calculations, the consumers were not able to meet their repayments to the FSP or they would not be able to make them without experiencing substantial hardship.

The loan
The consumers applied to the FSP for a loan for $522,000. The purpose of the loan was to refinance a home loan, an investment loan, a short term loan, a personal loan and 2 credit cards. The loan was to be secured by a registered mortgage over the consumers’ home at Karama NT. The FSP had the consumers’ home valued at $570,000.

Under the loan offer:
(a) the total loan amount was $523,260,
(b) the variable interest rate was 8.79% per annum,
(c) repayments were principal and interest, and
(d) the loan was to be secured by a registered mortgage over the consumers’ home.

The loan settled on 14 November 2014. In total, $509,154.58 was paid at settlement. There were not enough funds available to discharge the short term loan and the consumers entered into a new short-term loan with the original lender for $12,213.36.

The FSP was aware of how much of the short term loan would be repaid and the amount the consumers would need to cover any shortfall at settlement.

However, the FSP did not ask the consumers how they would pay that shortfall and pay off the rest of the short term loan.

The consumers did not make any repayments towards the loan with the FSP. The consumers listed their property for sale on 17 January 2015.

The borrowers applied to the CIO for an order that the loan was unsuitable.

The FSP denied the consumers’ claim. It said that it calculated the consumers’ ability to service the loan using the lodged tax returns.

The decision
The CIO decided the FSP was not entitled to charge interest on the principal amount because the FSP entered into an unsuitable credit contract with the consumers in contravention of its responsible lending obligations.

To resolve the complaint, the CIO recommended that the FSP:
(a) reduce the loan balance to the principal amount the consumers received, which was $509,154.58, and
(b) allow the consumers three months to:
(i) sell the security property,
(ii) refinance the loan, or
(iii) voluntarily surrender the security property to the FSP.

At the end of the three-month period, if the consumers have not taken any of these options, the CIO considered the FSP is entitled to take possession of the security property.

More about responsible lending