The dispute scheme got involved when the couple who bought the house complained their home had been sold too cheaply.
Lee and Brian bought a house in 2017 for around $550,000 with a deposit of $150,000 but they got into financial difficulty with their bank after Brian was made redundant.
They refinanced the loan with a non-bank lender, agreeing to pay $3000 a month in interest-only payments, and Brian got a new job.
But he was made redundant again and the couple missed the July 2019 payment on their loan. The lender demanded payments of the outstanding amount plus penalty interest of almost $2000 and a default fee.
The couple paid the outstanding amount and the default fee on July 17 but disputed the penalty interest. They then failed to make their August loan payment which resulted in the lender issuing a Property Law Act notice demanding full repayment of almost $450,000 by October 2 last year.
They could not pay the money and the lender went ahead with a mortgagee sale, selling the property for around $500,000 and leaving the couple with just $10k.
FSC could not find any flaws in the sales process but instead noticed "significant defects" in the Property Law Act notice.
It found the company had illegally demanded full repayment of the loan when they should only have been able demand the default amount of $4400. The company also calculated the penalty interest incorrectly.
"The lender demand almost $2000 in penalty interest, when it was only entitled to demand around $20. It was also not entitled to demand a default fee," the FSC noted in its annual report.
Susan Taylor, chief executive of the FSC, said it appeared the lender had incorrectly treated the loan as a business loan when making the demand for payment, rather than a consumer credit contract.
It proposed that the lender refund the interest and fees that were incorrectly demanded - a total of about $21k and asked the lender to consider a settlement offer.