28 September, 2015
Lender beware
WHAT YOU NEED TO KNOW
- The Supreme Court of Western Australia recently delivered its decision in Perpetual Trustees Victoria Ltd v Burns [2015] WASC 234.
- A single Judge held that a number of loan agreements entered into with an elderly couple, whose only source of income was a disability support pension, were unenforceable and were set aside.
- In an unusual result, an intermediary arranging the loan agreements was found to have acted as an agent on behalf of the lender. The acts of the intermediary were capable of binding the lender by way of apparent authority, despite express written terms to the contrary.
WHAT YOU NEED TO DO
- Review procedures followed by intermediaries when lending to borrowers.
- Ensure vulnerable borrowers obtain independent advice when applying for a loan.
- Review loan approval processes and loan approval criteria to ensure loans are made in accordance with the terms of the loan product.
Facts
Recently the Supreme Court of Western Australia found that a lender acted unconscionably in lending over $840,000 by way of six "low doc" loans to an elderly disabled couple whose only source of income was a disability support pension, for the purposes of real estate investment.
The loans were arranged through a number of intermediaries. There was no independent advice taken by the borrowers with respect to the loans.
The lender denied that the intermediaries acted as its agents in their dealings with the borrowers.
Proceedings
After the borrowers defaulted under their loans, the lender commenced proceedings seeking an order for possession of the defendants' home, which was the subject of a registered mortgage in favour of the lender. Alternatively, the lender sought payment of $266,849.83 from the borrowers in order to discharge the mortgage.
The borrowers argued that the mortgage and unenforceable, and the mortgage discharged, by
reason of unconscionable conduct by the lender.
Intermediaries as agents for the lender
The Court considered whether the various intermediaries who the borrowers dealt with in the respective loan applications were agents of the lender, or if the intermediaries' knowledge relating to the borrowers could be attributed to the lender. Justice Heenan identified this issue as a major point of controversy in the litigation.1
The lender maintained that there was no relationship of agency between itself and the intermediaries.
The existence of a relationship of agency involves a careful examination of the facts of each case. However, leading authorities in the area have held that in only very rare cases will a finance broker be an agent for a lender.
Despite this, following an analysis of the evidence, the Court held that in this case, the intermediaries were the agents of the lender when dealing with the borrowers.
The Court found that the effect of the agreements between the lender and intermediaries was that decisions to grant or refuse loans and determine loan eligibility were made by the intermediaries on the lender's behalf. The lender was obliged to accept those decisions and lend funds in accordance with the intermediaries' approvals.
Unconscionability
The lender argued that there had been no unconscionable conduct on its behalf and that relief should not be granted to the borrowers.2 Justice Heenan distinguished the case before the Court from the principles advanced by the lender in support of its position, namely that a lender:
- does not owe a duty to provide commercial advice to a borrower;
- has no general duty to assess the capacity of a borrower to repay a loan, or to ascertain the viability of a loan, or to verify the details provided in a loan application; and does not owe any duty under the general law to be alert for fraud by or on behalf of a borrower.
- Justice Heenan held that the above propositions apply to the general course of cases, but not in circumstances where the lender is dealing with a person with particular vulnerabilities.
Decision
His Honour held that there was a course of dealings between the lender and the borrowers via intermediaries who were agents of the lender, and whose knowledge should be attributed to the lender. The Court focused on the borrowers' physical and social disabilities, lack of employment prospects, income limited to social security benefits and that the borrowers were not properly eligible for the "low doc" loans extended to them.
The Court declared the mortgage in favour of the lender and related loan invalid and unenforceable. However, the Court sought to return the parties to their original position and ordered that the borrowers pay the lender the principal amount of $228,368.54 plus interest calculated at the Reserve
Bank Cash Rate (which was a much lower rate than under the loans), as an unsecured debt.
The Court also ordered that a substantial portion of interest and costs paid under the other five loans (which had already been paid out) be paid as restitution by the lender to the borrowers. This amount was set-off against the debt owed by the borrowers to the lender .
Implications
This decision is a rare example of a finding where an intermediary such as a finance broker has been found to be the agent for the lender. Lenders should take care when documenting relationships with intermediaries to ensure that it is clear that any intermediaries are not their agents. Further, careful consideration should be applied to the question of how much autonomy is ascribed to an intermediary to minimise the possibility of a finding of agency.
This decision also reiterates that the general propositions applicable to general lending do not apply in circumstances where the lender is dealing with a vulnerable borrower.
1 Perpetual Trustees Victoria Ltd v Burns [2015] WASC 234.
2 Perpetual Trustees Victoria Ltd [2015] WASC 234 at [222]
For further information, please contact:
Lucas Wilk, Partner, Ashurst
lucas.wilk@ashurst.com
