Debt consolidation refinance with a self-employed borrower and hidden expenses
A couple applies to refinance $410,000 of home lending and consolidate $38,000 of credit-card and Buy Now Pay Later debt into a single 30-year table loan. The application shows combined income of $148,000: $92,000 salary for one borrower and $56,000 for the other, who has been self-employed as a contractor for 14 months. They declare living expenses of $1,450 per fortnight, no dependants, and say they will save $600 a month after consolidation. The broker's assessment uses the declared figures and recommends approval at a 7.95% test rate. The lender's transaction data shows 11 BNPL debits in the last 90 days, two gambling transfers totalling $1,800, and grocery and fuel spending about 35% higher than declared. The self-employed borrower's tax return shows net profit of $41,000 after a $9,000 vehicle depreciation claim, and the accountant's letter is unsigned. The applicants want a fast decision because the credit-card promotional rate ends in 10 days.
1. What reasonable inquiries and verification should the lender complete before deciding whether the consolidated loan is affordable, and why are the declared expenses insufficient?
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The lender cannot rely on the broker's figures or the declared expense number. Under the CCCFA responsible lending principles and the Responsible Lending Code, it must make reasonable inquiries and be satisfied the borrowers can repay without substantial hardship. That means verifying income and expenses from independent sources: a signed accountant's letter, IRD income summary, financial statements and business bank statements for the self-employed borrower; payslips and an employment agreement for the salary earner; and at least three months of personal transaction records. The transaction data contradicts the declaration: BNPL debits are committed repayments, gambling is a discretionary outflow that must be considered, and grocery and fuel spending is materially higher than stated. The lender should also check whether credit-card limits will remain open after consolidation, because available credit can be redrawn. The self-employed income needs scrutiny: 14 months of contracting is short, and the $9,000 depreciation add-back should only be accepted if supported by the accounts and tax treatment. The lender should test at its higher assessment rate and include buffers for rate rises and living costs. If verified surplus is negative or thin, the correct outcome is to decline, reduce the loan, or require a debt-reduction condition, not to approve on the broker's figures.
2. The broker argues that consolidating debt lowers the monthly commitment and therefore improves affordability. Evaluate that argument.
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Lower monthly cash outflow is not the same as improved affordability. Consolidation spreads the $38,000 over 30 years, so the monthly payment falls, but total interest rises and the borrowers remain $448,000 in debt. The lender must assess whether the borrowers can meet the new loan at the assessment rate while covering verified living costs, not simply compare the old minimum payments with the new table payment. If the credit-card accounts stay open, the borrowers may rebuild the debt, so the lender should require closure or limit reduction as a condition. The claimed $600 monthly saving should be tested: the transaction data suggests actual spending is higher than declared, and BNPL commitments may continue. A useful check is residual income after tax, housing, other debt and verified expenses, with a buffer. If the consolidation only works because the term is stretched to 30 years and the expense base is understated, it does not demonstrate affordability. The lender may still approve a reduced consolidation, but it should document why the structure is sustainable and not rely on the broker's monthly-payment comparison.
3. What records should the lender keep, and what should it do if the applicants cannot provide the missing verification?
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The lender should keep a clear audit trail: the application and any changes, verified income documents, bank statement analysis, a reasoned expense assessment, the assessment rate and buffers, the residual income calculation, credit checks, the broker's recommendation, the lender's decision and any conditions. Under the CCCFA record-keeping requirements, the lender must be able to show what inquiries it made and why it was satisfied, or why it declined. If the accountant's letter is unsigned or the self-employed income cannot be verified, the lender should not treat the income as proven. It should request the missing documents within a defined timeframe, explain what is needed, and record the request. If the applicants cannot or will not provide them, the lender cannot make the required inquiries and should decline or offer a lower loan based only on verified income. It must not approve on condition that verification will arrive later if that would mean drawdown before the affordability test is met. If declined, the lender should give clear reasons and remind the borrowers of the internal complaints and dispute-resolution routes.