Lending responsibly to consumers: insights from the Moola settlement

8 October 2021

A recent Commerce Commission settlement has provided helpful insights into the Commission’s view of responsible lending obligations, and offers timely guidance to lenders who are updating and enhancing their responsible lending processes in anticipation of the more prescriptive regulations coming into force on 1 December 2021.

Breach of responsible lending obligations

On 6 October 2021, the Commerce Commission announced that it had entered into a settlement with Moola.co.nz Limited (Moola), an online short-term high-cost lender, after Moola admitted breaches of its responsible lending obligations under the Credit Contracts and Consumer Finance Act 2003 (CCCFA).

Moola provides high-cost short term personal loans of up to NZ$5,000 through the moola.co.nz and needcashtoday.co.nz websites.

Following an investigation by the Commerce Commission, Moola has admitted that it failed to comply with its responsible lending obligations for loans provided to 50 borrowers between 6 June 2015 and 30 November 2017. In particular, Moola has admitted that it failed to make reasonable enquiries of borrowers as part of its suitability and affordability assessments, failed to responsibly advertise its provision of credit, and failed to treat borrowers reasonably and ethically when breaches of loan agreements occurred. These are all breaches of the CCCFA, the legislation that governs those who lend money to consumers in New Zealand.

The terms of settlement shed light on the Commission’s view of the standard required of lenders under the current CCCFA. This will continue to remain relevant, even after new responsible lending regulations come into force on 1 December 2021. The admitted breaches include that:

  • No loan purpose obtained if borrowers selected “other” purpose from drop-down menu - During the loan application process, Moola did not offer borrowers the opportunity to give a full description of the reason for their loan. Borrowers were required to select the purpose of their loan from a finite list of options via a drop-down menu. Where borrowers indicated that the purpose of their loan was “other”, Moola did not follow up or obtain more information. Moola admitted that, contrary to its obligations under the CCCFA, it did not consider the borrower’s purpose in obtaining a loan.
  • Lesser loan amounts approved and advanced without consideration of suitability - Moola approved loans for less than the amount sought by prospective borrowers, and transferred the loan money to those borrowers, without inquiring whether the lesser amount would meet the borrower’s requirements and objectives.
  • Sole reliance on bank transaction data to determine loan affordability - Moola relied solely on bank transaction data provided by prospective borrowers in order to fulfil its affordability assessment (the assessment required to determine whether a borrower can afford to make loan repayments without suffering substantial hardship). Moola did not check whether the borrower had additional sources of income not deposited into the bank account, or other regular expenses not paid out of that account. This led to instances of Moola not accurately identifying and categorising a borrower’s income and expenses. Moola admitted a breach of its obligation to ensure loans are affordable.
  • Advertising encouraged repeat and unsustainable borrowing on last day of loan - Moola engaged in direct advertising through text messages and emails offering additional loans to current borrowers, including communications sent on the day the borrower’s last payment was due and encouraging them to reapply. Moola’s advertising did not warn borrowers that high-cost credit agreements should not be used for long term or regular borrowing and encouraged borrowing without regard to suitability.
  • Moola treated borrowers unreasonably and unethically once in default - When a borrower defaulted on a repayment, Moola attempted to telephone the borrower up to three times per day for ten working days, in addition to sending daily emails and text messages. If the borrower did not respond, Moola sent daily emails and texts to the borrower for up to 50 days, advising them that their repayment had been dishonoured and that payment was due.

Consequences of breaches

In addition to admitting breaches of its responsible lending obligations, Moola has agreed with the Commission to refund the interest and fees paid by affected borrowers on their loans. Moola has also given undertakings to the Commission:

  1. To implement enhanced responsible lending policies (in advance of the more prescriptive requirements coming into force from 1 December 2021),
  2. Not to advertise their high cost credit agreements without prominent risk warnings as to their suitability only for short term borrowing needs, and
  3. Not to advertise high cost consumer credit directly to borrowers in default or who have entered two or more loans with Moola within the preceding 90 days.

Second settlement for Moola

Moola had also entered in a settlement agreement with the Commission earlier in 2021, where it admitted to charging borrowers unreasonable default, establishment and processing fees between February 2016 and July 2017 (also breaches of the CCCFA). Moola agreed to credit or refund the affected customers the difference between the fee charged and a reasonable fee as calculated by the Commission, involving repayment to customers of approximately NZ$2.8 million.

What can lenders expect, once the new responsible lending regulations are in force?

After successive delays in implementation, from 1 December 2021, lenders will be required to comply with new prescriptive requirements when advertising to borrowers and when making enquiries as to the suitability and affordability of loans. The Commission has not signalled any ‘grace period’ for enforcement of the new responsible lending regulations. Rather, the messaging from Anna Rawlings, Commerce Commission Chair, is that lenders should be familiar with the new requirements and ensure that they have processes in place to assist them to comply, once in force.

Please get in touch with the contacts listed, or your usual Bell Gully adviser, if you have questions on the Moola settlement or would like assistance to understand and implement the forthcoming responsible lending regulations.

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.