The Responsible Lending Code

Business decisions can run afoul of the Responsible Lending Code

The Houston Chronicle reported on 1 June 2016 that Uber was offering leases on new cars as an incentive for new contract drivers. The car lease fee is deducted weekly from the driver’s earnings, regardless of how much—or how little—they earn that week. If they fail to make a payment, Xchange repossesses the car. One could argue that Uber is simply removing a barrier for those who wish to drive for them, and in doing so, is making it easy for the driver to meet lease obligations and for Uber to protect its investment. However, there are a number of issues with this arrangement.

Putting aside the potential employment issues, two other potential issues arise:

  1. the possibility of predatory lending; and
  2. whether the drivers really understand what they are getting into.

The Houston Chronicle pointed out that the drivers at which the scheme is aimed are often uneducated, have poor credit, and a lack of familiarity with contracts and business, which makes it more likely that they will either not fully understand the terms or feel that they have any other choices.

How would such a programme play out in New Zealand? In the first instance, Uber and/or Xchange would be required to be a member of a financial dispute resolution scheme.

Further, based on the information available, it is likely that the programme could run afoul of several of the principles of the Responsible Lending Code, which came into effect in June 2016. For example, Principle 4 states that the lender “must, in relation to an agreement with a borrower, make reasonable inquiries, before entering into the agreement, so as to be satisfied that it is likely that the credit or finance provided under the agreement will meet the borrower’s requirements and objectives.” While getting a car so that the driver can earn money as a driver for Uber is one of the objectives, the underlying objective is about creating sustainable income. If a high proportion of the driver’s earnings are eaten up by leasing fees, then one could argue that Xchange has failed to adequately consider whether the lease meets the borrower’s requirements and objectives.

Similarly, Principle 5 requires lenders to “make reasonable inquiries, before entering into the agreement, so as to be satisfied that it is likely that the borrower will make the payments under the agreement without suffering substantial hardship.” Again, if the goal is for the driver to create a sustainable primary or supplementary income driving for Uber, then the leasing arrangement may violate Principle 5 if a high proportion of the driver’s earnings are going to the lease. There is an interesting intersect here with employment issues as well. Uber drivers are independent contractors, meaning that they are not employees of Uber and Uber does not have the right to exercise control over how often the driver works. However, a leasing arrangement like that offered by Xchange could cloud the employment relationship with Uber, and depending on the size of the lease payments, could interfere with the driver’s ability to take on other forms of work.

Principle 7 requires lenders to help borrowers make informed decisions. Depending on how the lease documentation and the independent contractor relationship are composed, the borrower may not fully understand the ramifications of the decision to take the lease or to drive for Uber while under lease obligations.

Finally, Principle 2 requires that lenders “must, at all times, exercise the care, diligence, and skill of a responsible lender.” The commentary to Principle 2 states that if “the lender breaches any of the lender responsibilities, it is likely that they will also have breached the lender responsibility principle to act with care, diligence, and skill.” Acting with care, diligence and skill are standalone requirements under the Code as well.

The takeaway is that when introducing a new financial product, not only consider what it can do for your customers, consider how it could be misused or misunderstood, or have a disproportionate effect on vulnerable consumers. The answers to these questions along with adhering to the Responsible Lending Code’s principles can help guide the level and kinds of disclosures you make or whether you introduce the product at all. 

Jennifer Mahony, Former Scheme Manager now Client Director TDR