Banks and credit agencies that lend tens of thousands of dollars to vulnerable people incapable of making rational decisions or can barely make payments are undermining the credit system, warns financial writer Gail Vaz-Oxlade.
“Lenders used to have brains. Now they have the credit scoring system,” Vaz-Oxlade said. “When the credit crunch hits us in Canada, it’s not going to be a pretty sight.”
Vaz-Oxlade was reacting to the experiences of two low-income people who bought vehicles from Edmonton car dealers, despite being mentally incapable of understanding the implications of what they were doing.
CBC Go Public reported that Sean Amer was able to secure a $65,000 loan through Crosstown Motors despite being a patient in a psychiatric hospital and living on government assistance of less than $1,600 a month.
Crosstown eventually cancelled the sale, but Amer’s family says the dealer initially resisted, saying the Royal Bank had approved the loan.
After seeing Amer’s story, Della O’Malley called Go Public to say she had been stuck paying for two cars she bought from City Ford while she was in a manic state brought on by a prescription drug.
O’Malley says her ordeal began in May 2011, when she was admitted to University of Alberta Hospital while on a weekend visit from Saskatchewan.
O’Malley spent seven weeks in hospital while doctors tried to diagnose what was causing her kidneys to fail.
One of the drugs she was given was Prednisone, a powerful anti-inflammatory that has significant side-effects, including mania.
Following her release from hospital, while living in the University Outpatient Residence, O’Malley went with a new acquaintance who wanted to go look at cars.
“(It was) something to do," O’Malley said. "That’s why I went.”
Buying a car was the furthest thing from her mind, she said.
“I had a beautiful Honda Accord, fully-loaded with leather. It was in Saskatchewan where I was living.”
However she left City Ford that day having bought two brand-new cars with all the options, a Ford Fusion and a Ford Fiesta, leaving her in debt for more than $70,000.
Loans came from different banks
O’Malley, who is studying theology and has worked as a youth minister, said she wasn’t thinking rationally when she caught sight of the Fiesta with the yellow paint and decals.
“For some reason I just looked at that (Fiesta) and thought how wonderful it would be if I was driving that car and youth would be attracted to the car, and I’d do ministry better ... and the next thing I know we were back in the showroom writing up documents for both vehicles.”
O’Malley said no bank would have approved her for two car loans, particularly since her work as a youth minister paid only $25,000 a year.
However, City Ford secured loans from different banks for each of the cars.
In both the O’Malley and Amer cases, the applications were submitted electronically, outside normal banking hours.
O’Malley denies lying to the dealership, but says the application was filled with false information about where she lived, her marital status, what assets she owned and how much she earned.
She says she didn’t read anything she was signing, that in her mania she would have believed anything and signed anything.
“I’m usually quiet and shy. I just felt I was this millionaire person and could fly to the moon,” she said.
“If somebody had suggested let’s start a company and fly around the world ... I’d have said, 'Yeah! I can do that!'”
It wasn’t until two months later, when the Royal Bank contacted her about missed payments and doctors had begun weaning her off Prednisone, that O’Malley understood the significance of what she’d done while in the drug-induced state.
”(I was) mortified, shocked, horrified. I didn’t know what I was going to do. I was so sick from dialysis. I had no family, no friends. I didn’t know where to turn.”
O’Malley said she tried appealing to the bank, legal aid, Service Alberta and the Alberta Motor Vehicle Industry Council.
Six months had passed before she went to City Ford armed with a letter from her psychiatrist explaining her drug-induced mania, but the dealership refused to budge.
Credit system must be changed, critic says
Car dealers aren’t qualified to assess a customer’s mental competency and it’s the bank’s job to assess their financial state, says City Ford general manager Mike Vida.
“The banks approved the transaction and that’s an issue that would matter to a bank and not City Ford Sales,” he said.
Vida says the dealer's financial officers simply enter whatever information the buyer provides.
“The banks make the decision as to what’s required for financing,” he said. “In the olden days, the banks used to require proof of income. That’s no longer required.”
Vida says it would be normal practice to use one bank to finance the Fiesta and another for the Fusion.
O’Malley’s and Amer’s cases are just two examples of the credit score system Vaz-Oxlade says was designed to assess consumers’ profitability to the bank, instead of their ability to service a loan.
A person who makes only the minimum monthly payment on a credit card debt gets a higher credit score, she said.
“It measures the wrong the thing and we’re giving credit to people who should never have had it.”
The Royal Bank, which eventually repossessed the Fusion, refused to comment.
The Canadian Bankers Association, which represents banks operating in Canada, wouldn’t comment on specific cases.
In emailed statement the CBA said, “Canadian banks are prudent and conscientious lenders and only extend credit after doing their due diligence to determine if those requesting a loan can pay the money back.
"Lending money to people who can’t pay it back doesn’t make good business sense for the bank either from a financial or customer relations perspective.”
O’Malley, who has since moved in Edmonton, was forced to sell her Honda and is still making payments to TD Bank for the Fiesta.
She’s living on AISH and must have four-hour dialysis treatments three times a week.
“My credit rating is now ruined,” she said. “People suggested I go bankrupt, but I didn’t want to do that.”