Sneaky lenders sign up family as 'co-borrowers' to dodge guarantor laws

Tuesday, 14 September 2021

Bank, insurer, lender, broker or adviser done you wrong? Complain to one of the four official financial services complaints services. First published in 2019.

A mother was shocked when a finance company told her it intended to take her car because her daughter had missed repayments on a loan.

The mother did not realise the lender had signed her up as a “co-borrower” on her daughter’s loan, and that her car was pledged as security in case her daughter failed to repay it.

The case was publicised in the annual report of Financial Services Complaints Limited, one of the four authorised financial services complaints services.

It revealed a number of cases in which lenders signed family members of borrowers up to loans as co-borrowers instead of as guarantors, which would have required the lenders to tell them to get independent legal advice before they signed.

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Following an investigation, FSCL found the mother agreed to guarantee her daughter's loan, but that the lender recorded her as a co-borrower, and not a guarantor as she had believed.

Susan Taylor, FSCL’s chief executive, said the lender had failed in its responsible lending obligations.

Not only had the lender failed to assess the mother’s ability to repay the loan without suffering substantial hardship, but it had not given her a copy of the loan agreement, Taylor said.

The lender has also not advised her to seek legal or independent advice before agreeing to guarantee the loan.

FSCL had told the lender, who is guaranteed anonymity by the complaint’s schemes rules, to remove the mother as a co-borrower from the loan, and withdrawn its repossession notice, which it did.

Taylor said FSCL had seen an increase in cases where people found themselves liable for debt they didn’t fully understand they were signing up for.

In one case, similar to the mother’s, a father paid over $5000 of his daughter’s debt, after she listed him as a co-borrower for her loan without his permission.

In another case, a single mother found she was a co-borrower on a loan taken out by her former partner, who had left her.

Taylor said FSCL handled 931 complaints in the 12 months to the end of June, compared to 768 in the previous 12 months.

After travel insurance, irresponsible lending prompted most complaints.

Taylor said FSCL negotiated or awarded compensation totalling $1.75 million up from just under $990,000 in the previous year, with the largest individual settlement being $500,000 in a complaint taken by a person against their financial adviser.

There is a push from budget agencies to have the four complaints schemes merged into one to make it easier for people to know who to complain to.

The four schemes are FSCL, the Banking Ombudsman, The Insurance and Financial Services Ombudsman, and Fairway Resolution.