In the recent decision of the Queensland Court of Appeal in Barker v GE Mortgage Solutions Limited, the lender was successful in opposing the borrower’s attempts to reopen a 2007 loan secured by a residential mortgage.
Section 76 of the National Credit Code (Cth) gives the court power to reopen unjust consumer transactions involving a loan, mortgage or guarantee. The section lists a number of factors relevant to the exercise of the court’s discretion.
In Barker, the loan was a ‘lo doc’ loan for $259,250 advanced in 2007 and secured by a residential mortgage. The loan was not for business purposes.
The borrower sought the loan for the purpose of refinancing an existing loan and to pay out other debts.
The borrower alleged that, after she had signed the credit application, the broker, without her knowledge, had completed the financial details of the loan application by incorrectly inserting her income as $120,000 per annum, which was contrary to the financial documents she had given the broker.
The borrower also alleged that at the time of her credit application she had disclosed to the broker that she was in receipt of Centrelink benefits: however this was not disclosed to the lender.
The borrower was able to make loan repayments for approximately 18 months before she sought hardship relief.
The crux of the borrower’s case was that the loan and mortgage should be reopened because the transaction was unjust.
Central to the borrower’s argument was that the broker had misstated her income and financial position and that at the time of the loan application she did not have capacity to repay the loan.
As a threshold issue, the Court of Appeal applied earlier authorities that have held generally, but subject to the terms of the relevant contract, that brokers are not the agent of the lender.
On the facts, it did not matter that the broker had received a commission or introduction fee from the lender.
The Court of Appeal also observed that the credit application signed by the borrower contained an acknowledgment that the broker was not the agent of the lender and that the broker acted independently of the lender.
Despite the loan having been advanced prior to the commencement of the National Credit Code, it was a ‘carried over instrument’ under the National Credit Code and the Court considered that it had the power to re-open the transaction under the new regulatory regime.
Section 76(2) sets out grounds (a) to (p) for considering whether a transaction is unjust. Significantly, (p) is ‘any other relevant factor’.
The Court of Appeal made the following comments about the application of section 76:
- ‘the definition of “unjust” in section 76 is not an exclusive one.’
- ‘In considering whether a term of a credit contract or mortgage is unjust, the court is to consider the circumstances relating to the credit contract or mortgage at the time it was entered into.’
- ‘The court may consider the matters listed in section 76(2)(a) to (p) and is to have regard to the public interest in all the circumstances of the case.’
- ‘[A] lender’s failure to make an inquiry… is a circumstance that might be taken into account in making a determination as to whether a term of a loan contract or mortgage was unjust.’
- ‘Circumstances not reasonably foreseen when the contract was entered into are not to be taken into account.’
Factors relied on by the borrower
Inability to afford the loan
The borrower asserted that she was unable to afford the loan provided by the lender.However, the Court of Appeal confirmed that ‘the fact that a party cannot afford a loan has been held to be insufficient on its own to result in a finding that the loan contract is unjust’.
Inequality in bargaining power
The borrower also contended that there was an inequality in bargaining between the parties.
The Court of Appeal, in applying West v AGC (Advances) Ltd (1986) NSWLR 610 said ‘mere procedural factors such as inequality of bargaining power without more, such as the lender abusing or taking advantage of that power, is unlikely to be a sufficient basis for a finding that a contract is unjust’.
The borrower had asserted that the lender’s mortgage provisions were non-negotiable and oppressive. On the facts, the Court of Appeal said there was nothing to suggest that they were other than common and standard type provisions.
The broker’s alleged conduct
Based on its finding regarding the agency of the broker, the Court of Appeal said that there was no basis for reopening the loan transaction based on any misrepresentation or misconduct by the broker concerning the borrower’s income. Any misrepresentation or misconduct by the broker could not be attributed to the lender.
What did the lender know or ought to have doubted?
The borrower alleged that the lender knew, or had reasons to suspect, that the borrower would not be able to meet her financial obligations under the loan agreement. Alternatively, she said that the lender failed to make reasonable enquiries that would have uncovered reasons for doubting her capacity to repay.
Although the loan was a ‘lo doc’ loan, the lender did seek various financial details in the application form, which were provided by the borrower. This included the borrower’s income, which the borrower claimed was incorrectly stated as $120,000 by the broker. It was noted by the Court, however, that the loan application contained various declarations by the borrower concerning the accuracy of the information provided.
On the facts, the Court held there was nothing in the material before it to indicate that the lender knew at the relevant time that the borrower could not pay in accordance with the terms of the loan contract or not without substantial hardship.
While the loan application documents revealed some outstanding debts at the time the loan contract and mortgage were entered into, an explanation was offered in the documentation provided by the broker for the borrower’s credit issues, which were not put in issue by the borrower. There was nothing to cause the lender to doubt the explanation provided and the debts referred to did not alone demonstrate an inability to meet the loan payments.
The Court did not specifically rule on the question of what would have constituted a reasonable enquiry beyond seeking the declarations from the borrower, but found that the borrower could not succeed on this point because she had failed to put evidence before the Court of her true financial position at the time of the loan application. In addition, the fact that she had made repayments for 18 months pointed to a conclusion that there was nothing for the lender to discover by making further enquiries.
Many lenders will have, in their existing portfolio, loans that were advanced prior to the commencement of National Consumer Credit Protection Act 2009 (Cth), in times when lo-doc loans were common, even among code-regulated transactions. Other lenders continue to advance lo-doc loans in their commercial portfolios.
These lenders can take a degree of comfort from this decision in that the Queensland Court of Appeal has indicated that it will not hold such loans to be automatically unjust and, in the absence of the lender taking unfair advantage of the borrower, will hold borrowers to the declarations in their loan application forms.
It is noted, however, that at the time of the Barker loan the provisions of Chapter 3 of the National Consumer Credit Protection Act 2009 (Cth) (responsible lending conduct) were not in force and did not apply to the loan. Division 3 of Chapter 3 Part 3-2 of that Act, provides, for example, that before a credit contract is entered into, a credit provider is obliged to make an assessment as to the unsuitability of the credit contract (see sections 128, 129, 130, 131 and 132).
Based on this change in the law, lenders in the consumer or residential investment environment must comply with the responsible lending conduct provisions in relation to their lending decisions.
Additionally, even in commercial lending, it remains good industry practice to make inquiries to independently verify the borrower’s statements regarding their income, particularly where the loan application form is received through a broker (especially if the broker has a close connection with the lender).