Westpac has told the banking royal commission a Bank of Melbourne car loan granted to a carer in 2012 which she could not afford to pay back would not have been approved today.
- Nalini Thiruvangadam earned $350 per fortnight and was signed up to fortnightly car loan payments of $259
- Car dealerships could set higher interest rates on car loans to get larger commission
- Westpac says Ms Thiruvangadam’s loan ‘unacceptable’, would not happen today
Nalini Thiruvangadam told the commission she had wanted to buy a new car for her job looking after elderly people because her old car caught fire while she was driving, but she could not get a bank loan because of an unpaid credit card.
The personal care attendant found a car dealer about 50 kilometres from where she lived who agreed to give her a car loan despite her fortnightly income of $350 from her job as a personal care attendant and $600 from Centrelink benefits.
She also paid rent of about $1,000 a month.
Ms Thiruvangadam said she was kept at the car dealership for about two hours into the night while she waited to sign the loan documents.
The mother of two did not realise until she got home and read the loan documents that she had bought a used car, a demonstration model Ford Focus, with lots of mileage and which stalled regularly.
The car dealer refused to cancel the loan, saying Ms Thiruvangadam had already signed the documents even though she said she could not afford the payments of $259 a fortnight.
“I was shocked and I know I can’t afford to pay that because when I was signing he did not explain to me anything how much I’m going to pay and all this,” she told the commission.
“Every payment I was struggling, since I was working as a casual my income wasn’t good.”
In September 2012, Ms Thiruvangadam fell and hurt her knees and lost her job because of the injury. The bank suspended her loan payments for six months on hardship grounds.
She was also forced to borrow money from her brother and uncle and had to delay paying bills, including rent, to pay off the car loan.
“I was really struggling. I have to stop my rental payments several months, two, three months,” she said.
“I also sold jewellery [that] was given to me by my mum, I sold jewellery for my sons, given by my mum, all I sold in Cash Converters shops, just to catch up with the payments,” a tearful Ms Thiruvangadam told the commission.
The Consumer Action Law Centre in Melbourne helped Ms Thiruvangadam, and the Bank of Melbourne agreed to a $20,000 refund and she kept the car.
The bank also agreed the loan should not have been approved.
Car dealer kickbacks a conflict of interest
Westpac’s general manager of specialist finance, Phillip Godkin, told the hearing Ms Thiruvangadam should not have been given the loan.
He said Westpac had tightened its credit policies for car loans since 2012 and some Centrelink benefits would not be approved as income for a loan.
“It’s not on the acceptable income list, it’s therefore deemed unacceptable so you would not approve the loan on that basis,” Mr Godkin said.
“In this case, the customer was not an A-rated existing customer or indeed a homeowner. She would not qualify.”
Mr Godkin also told counsel assisting the commission Albert Dinelli the way car dealers are remunerated is a conflict of interest because the more cars they sell, the higher their commission, and car dealers have the discretion to set the interest rates paid by customers — a process known as flex commissions.
Flex commissions are paid by lenders to car dealers and allow the dealer to set the interest rate on the car loan. The higher the interest rate the larger the commission earnt by the dealer.
“Is it right to say that one of the concerns about flex commissions is that the interest rate charged to the consumer is not related to their credit rating or risk of default but to what they can negotiate with the dealer?” Mr Dinelli asked.
“That’s fair,” Mr Godkin said.
“Is it right to say that it provides an incentive for sales intermediaries to increase the price of a credit contract?”
“It can, yes.”
He admitted Westpac continued to pay flex commissions because it would lose money if it stopped the practice.
“The issue in this market in terms of the way that we compete is that it would be impossible to stop it unilaterally without stepping away from the market altogether,” Mr Godkin said.
He agreed with Commissioner Kenneth Hayne that the situation would remain unchanged until flex commissions were banned by ASIC in November this year.
Mr Godkin told the commission Westpac believed the car-financing system needed to be improved to protect consumers.
Aside from tightening its car-lending policies, the bank also developed a code of conduct for car dealers.
But Mr Godkin also admitted that in the vast majority of car loans, customer spending was not verified.
Despite ASIC asking Westpac to stop financing add-on insurance policies, the bank refused.