In a decision handed down recently, the Court of Appeal set aside earlier orders made in the Supreme Court of NSW granting relief to elderly borrowers under the Contracts Review Act 1980 and the National Credit Code (“Code”). The decision may assist in understanding a lender’s obligations when dealing with elderly borrowers.
The case involved an elderly couple, Mr and Mrs K, who borrowed $1.2 million.
The borrowers secured the loan by granting a mortgage to the lender over their residential property.
In their loan application, the borrowers included a commercial property in Marrickville in their statement of assets (but the Marrickville property was not provided as security for the loan).
Of the amount advanced, $957,024.07 was used to refinance an earlier mortgage debt owing to another lender, $100,000 was given to their daughter and the balance was put towards their restaurant business in Marrickville.
The borrowers defaulted on their loan and the lender commenced proceedings for debt and possession of their residential property.
The borrowers commenced their own proceedings against the lender seeking, among other things, a declaration that the loan and mortgage were unjust under the Code and Contracts Review Act 1980.
The Supreme Court decision
At first instance, the Supreme Court held that the lender’s conduct was unjust. The Court varied the loan agreement to put the borrowers in the same position they would have been in, if they had maintained their loan and not refinanced their prior loan. The practical effect of this was that the amount the borrowers owed to the lender was substantially reduced.
In deciding that the lender’s conduct was unjust, the Supreme Court made the following findings:
- The borrowers were unable to protect their own interests on the basis that they were “too old and too foolish to know what was in their best interests.”
- The borrowers had poor financial acumen and their long loan history and numerous refinances and changes of mortgagees did not reflect prudent and responsible financial management.
- The lender failed to undertake reasonable enquiries into the estimated value of an asset held by the borrowers and included in their loan application on which their “exit strategy” depended (that is, the Marrickville property).
Implications of the decision
The practical implications of the orders made at first instance had far reaching consequences for the lender. The decision suggested that a lender may be required to carry out additional enquiries to ensure the veracity of declarations made by borrowers as to their income and assets. This would be particularly onerous for lenders offering ‘lo doc’ loans and could extend to an obligation on lenders to obtain valuations for assets even where those assets were not being provided as a security.
The Court of Appeal unanimously allowed the appeal by the lender and held that the lender’s conduct, contract and mortgage was fair, reasonable and enforceable.
The appeal overturned the first instance decision, including, for the following reasons:
- There was no evidence to suggest that the estimated value of the Marrickville property was incorrect in the borrowers’ loan application.
- The borrowers’ long history of entering into prior loans did not warrant a finding of financial immaturity.
- Age, without evidence of something more, cannot be evidence of an inability to protect one’s own interests.
- The borrowers received the full benefit of the loan proceeds and should not be relieved of their payment obligations.
This is good outcome for lenders. It confirms that a lender may rely on the declarations of a borrower contained in a loan application. It also confirms that the age of a borrower, without something more, cannot form a basis to prove a loan is unjust.