Core Legal | Commercial Property and Relationship Property Lawyers in Masterton & Wellington

A recent decision by the Insurance and Financial Services Ombudsman highlights the legal obligation lenders have to ensure borrowers can afford credit before extending or increasing loan limits. The case serves as an important reminder that lenders must follow responsible lending principles when offering credit, particularly when increasing borrowing limits over time.

At Core Legal Masterton & Wellington, we regularly advise clients in Masterton, Wellington, and across the Wairarapa region on financial disputes, consumer rights, and lending obligations under New Zealand law.

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Background of the Case

The borrower initially obtained a credit card with a modest credit limit of $3,000. Over several years, the lender approved a series of limit increases until the credit limit eventually reached $17,300.

However, during this time the borrower had become unemployed and was no longer in a position to repay the debt without experiencing financial hardship. Despite this change in circumstances, the lender did not conduct sufficient checks into the borrower’s financial situation before approving the increased credit limit.

As the outstanding balance grew, the borrower lodged a complaint with the Insurance and Financial Services Ombudsman.

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Ombudsman Decision: Failure to Lend Responsibly

After reviewing the case, the Ombudsman determined that the lender had failed to act responsibly when extending further credit.

Responsible lending standards require lenders to take reasonable steps to ensure that a borrower can meet repayment obligations without suffering substantial hardship. This typically involves assessing the borrower’s:

• Income and employment status

• Existing debts and financial commitments

• Overall financial position

• Ability to repay the credit over time

In this case, the Ombudsman found the lender had not adequately assessed the borrower’s ability to repay the additional credit after he became unemployed.

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Outcome of the Complaint

Because the lender failed to conduct proper affordability checks, the Ombudsman ruled in favour of the borrower.

As a result:

• The outstanding credit card balance was wiped

• The credit card account was cancelled

• The lender was unable to recover the debt

This outcome reinforces an important legal principle in consumer credit law: lenders may lose the right to enforce a debt if they fail to meet responsible lending obligations.

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Why Responsible Lending Matters

Responsible lending laws are designed to protect borrowers from taking on debt that they cannot reasonably afford. These rules also encourage lenders to carry out careful financial assessments before approving credit.

For borrowers, this decision highlights that you may have legal options if a lender has extended credit without properly assessing affordability.

For lenders, it serves as a warning that failure to follow proper processes can result in significant financial losses and reputational risk.

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Seeking Legal Advice

Disputes involving loans, credit cards, or finance agreements can be complex. Whether you are a borrower facing financial hardship or a lender seeking guidance on compliance obligations, early legal advice can help you understand your rights and responsibilities.

Core Legal Masterton & Wellington offers practical and cost-effective legal guidance, including fixed-fee initial consultations to help clients quickly understand their options.

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Frequently Asked Questions (FAQ)

What is responsible lending in New Zealand?
Responsible lending requires lenders to ensure borrowers can repay loans without experiencing substantial financial hardship.

What checks must lenders carry out before approving credit?
Lenders should review income, expenses, employment status, and existing debts to determine whether repayments are affordable.

Can a lender still recover a debt if they failed to assess affordability?
In some cases, no. If a lender fails to meet responsible lending obligations, enforcement of the debt may be limited or prevented.

Who can I complain to about a lender?
Borrowers can lodge complaints with dispute resolution schemes such as the Insurance and Financial Services Ombudsman.

What should I do if I cannot repay my loan?
You should contact the lender immediately and consider seeking legal or financial advice to explore your options.

When should I seek legal advice about a lending dispute?
You should seek legal advice as soon as possible if you believe a lender has acted unfairly or failed to assess your ability to repay credit.

If you need advice regarding lending disputes or consumer rights in Masterton or Wellington, professional legal guidance can help protect your financial interests.