Karamihos v Bendigo and Adelaide Bank Limited [2013] NSWSC 172

This case involved elderly couple with limited English who had always been very highly geared and had a history of numerous loan refinancings. The refinancing of their existing home loan was approved upon the basis of their exit strategy, namely the sale of their commercial property, valued optimistically by the husband at $2m. It was in fact worth $800,000. The borrowers both became ill, and defaulted.

The court found that the National Credit Code applied to the loan and mortgage (which applies retrospectively), on the basis that it was provided wholly or predominantly for personal purposes.

Section 76(1) of the Code permits the court to reopen a transaction if satisfied that it was ‘unjust’ in the circumstances relating to it at the time it was entered into. The primary mandatory consideration is the ‘public interest’. The court commented:

There is an undeniable public interest in the protection of aged borrowers who do not know what is in their best interests and are not able to look after themselves, where the security for the borrowing is their sole residence.

The financial loss to the lender will always be measurable but the impost on the public health system, the public housing system and the various state and federal government programs for the provision of security benefits, may be incalculable.

The court had regard to the following:

  1. the consequence of non compliance by the borrowers, namely the loss of their sole residence;
  2. the relative bargaining power of the parties;
  3. the absence of any negotiation at the time the transaction was entered into, and absence of any practical opportunity for there to be any negotiation;
  4. the borrowers were not reasonably able to protect their interests because they were too elderly and too foolish to know what was in their best interests;
  5. the borrowers were not able to read and fully comprehend the typed written documents that they were required to sign and had no apprehension of the risks they faced in the event of unexpected illness, retirement and diminution of earnings. They were comforted by their apparent success with previous loans and were naively untroubled by the probability that all would not necessarily continue, without hitch or hurdle, in the future;
  6. the bank did not make reasonable enquiry as to whether the borrowers could meet their obligations under the loan and relied on the borrower’s own estimate for the value of their commercial property, which the court found was unreasonable.
  7. the fact the borrowers had no independent legal or financial advice and this was known to the lender, who took no steps to ensure they understood the transaction;
  8. the fact their daughter who stood to receive $100,000 from the loan was in no position to dissuade her father;
  9. the finance broker had no commercial incentive to advise the borrowers that the loan was unsuitable for them.

The court made the following comments:

  1. “the loan was a bridge too far, at too late a stage of their fast-fading lives”; and
  2. “there was no fraud by the borrower, just misplaced enthusiasm and an absence of reality”.

The court found the loan unjust under the Code and the Contracts Review Act. The court ordered that the borrowers be put in the same position they would have been in had they not taken on increased borrowings on the new terms. The court ordered that the loan refinanced be treated as notionally continuing, as if there had been no refinance.

As always with legislation that requires judges to decide what is “just in all the circumstances” the outcome is most closely influenced by the length of the judge’s foot. This is because different facts tug different heart strings in different judges.

Just last month the same court held that with a low doc loan, the lender is not required to make further enquiries as to serviceability and that is acceptable commercial practice (see our case note on Provident Capital v Naumovski [2013] NSWSC 40).

This case seems to suggest lenders must make reasonable enquiry as to whether the borrowers can meet their obligations under the loan and cannot rely upon the borrower’s own estimate for the value of their commercial property, even though the loan is low doc.

In low doc loans, the interest rate charged reflects the lack of documentation supplied and verification required – Provident Capital v Naumovski [2013] NSWSC 40 at [292/3]. In other words, the risks associated with the absence of checking are taken into consideration in the fixing of the interest rate. This decision appears not to take account of this feature of low doc loans and makes verification compulsory, even though this is precisely the feature that makes the loan a low doc loan.

Click here to read the full judgment

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