Two sets of parents gave guarantees and mortgages for a loan to their children who were married to each other. The loans were then transferred to a different bank and the parents became borrowers and mortgagors, with one of the children’s properties released from the security. The parents argued that their change of status was not explained to them and they raised a Contracts Review Act defence. The broker argued that his diary notes of conferences with the parents showed they knew perfectly well that they were to become borrowers on the refinanced loans. The lender sued for possession of the parents’ homes. The lender won at first instance, the parents appealed and the matter was remitted for re-trial. The broker went bankrupt shortly before the re-trial.
The court found that both parents were unreliable and to some extent dishonest. However the court also found that both parents had a language problem and were not sophisticated in terms of their understanding of commercial matters beyond the basics of what a guarantee, mortgage and loan is. The court found that the son’s father was misled into believing that the original guarantee was limited to $100,000 but was advised by his lawyer that he could be liable up to the value of his house in the event that his son and wife did not pay. The court found that the daughter’s mother was prepared to sign whatever she was asked without attempting to read the document she was signing or to seek advice from a lawyer even when she attended her lawyer’s office. In this regard, the court noted that the fact both the daughter and her mother were prepared to sign any document put in from of them by the son did not of itself provide any defence to them. In addition, the court found that the mother knew about her increased potential liability with the release of the her daughter and her husband’s security. Critically, the court found that both parents believed their children that they were simply signing documents to transfer their guarantees to a new lender because of the lower interest rate and not that they were being made borrowers. This was despite the father receiving advice from a lawyer who explained the documents to him. Although the father’s lawyer was not sued, the court cautioned solicitors to ask their clients what they understand about a transaction rather than simply making statements to them and then asking if they understand because clients like the parents might say they understand when they do not have a full grasp of what is being said.
The court did not believe the broker and found that he fabricated his diary notes. The court also found that the son forged a sham contract to make it look like his father was purchasing the property he had already bought and the broker knew this contract was a sham.
The court found that the lender had certain information that ought to have put them on notice to make further enquiries before going ahead with the loan and made certain errors:
- The lender knew the son’s parents were 70 years old, yet they were approving a 30 year loan. The lender required the parents’ true employment to be corrected in their application but did not follow this up.
- The lender breached its guidelines. Although this was a Low Doc loan, the lender did not follow its own guidelines in requiring proof of earnings for self employed borrowers (eg. an ABN or tax returns). If tax returns had been required, the lender would have readily ascertained that the parents’ employment was false and they had no capacity to service the loan. This made the loans pure asset lending. The lender also failed to make a pre-settlement call to the parents which would have disclosed the true position, that the loans were only for the benefit of the children and that the children would be making the loan repayments. The lender also treated the loan as a refinance on the basis that the broker wrote the mother’s third party guarantee while the broker was working for the old lender when nothing in the guidelines permitted this.
- The loan was only approved for a smaller amount, which put the lender on notice that the loan could not be used to both refinance the existing loan and purchase the property.
- The lender knew that the property was not part of the security for the loan which strongly suggested that it was not being purchased as an investment with the attendant tax benefits, even though the parents had their family homes.
- Not all identification documents were sent through to the lender.
- The rates notes sent to the lender disclosed that the parents were pensioners, which was inconsistent with their being self-employed investors earning large amounts of money. The lender made no enquiry about the inconsistency.
- The summary of the application showed that the loan purpose had changed from the purchase of a residential property to the purchase of an investment property, with no explanation as to why.
- The loan was approved despite its LVR exceeding the lender’s guidelines, with no explanation as to why.
- The monies were actually disbursed to pay out some other person’s loan accounts, not the borrowers’ loan accounts and not to purchase property. Further, the condition of approval of the loan was not met because the money was paid to the children themselves rather than their home loan account.
- The lender knew there were third party mortgage issues, contrary to the statement made by the lender’s employee.
- The lender received documents from the parents’ lawyers in relation to the property being purchased whereas the loan purpose had changed to exclude this.
- The parent’s statutory declarations did not state their occupations.
The court said:
The significant matter is that, in respect of both loan applications, if the Plaintiff had followed even some of its guidelines or had made the most cursory enquiries as a result of matter about which it was clearly on notice, the real position would have been exposed and the loan agreements would never have been made.
Was the loan unjust?
The court said:
The starting point must be that, objectively speaking, the contracts were improvident to a substantial degree because the Defendants who had been guarantors were transformed into principal borrowers without any right of recourse against the children who were obtaining all of the benefits of the borrowings.
The court noted that as far as the parents were concerned they went from being guarantors for a limited amount to borrowers for a much great amount, losing rights of recourse under their guarantees, whilst receiving none of the loan funds, with the children receiving the benefit of the loan (some of which was paid to them direct and some of which was applied to reduce their home loan) and the benefit of having their property released from security.
The court found the loan and mortgages unjust and further that the lender had engaged in unconscionable conduct because the parents were under a special disability by reason of their age, language, education and their ignorance of the financial position of their children and the new loan and mortgage documents put in place to benefit their children. The court found that the lender was on notice of some of these matters which ought to have put it on enquiry that it might be taking advantage of the parents.
As regards relief, the court set aside the parent’s loan and mortgages and declined to give any credit to the lender for the benefit received by the parents for the release from their earlier mortgage and guarantee. The court justified this on the basis that:
- at the time of the original loans and mortgages, the children were not in default nor was there any threat that the guarantees would be called upon and the mortgages enforced so the parents had only contingent liabilities that had not crystallised; and
- the lender was not without notice that there were matters that needed further enquiry and failed to adhere to its own guidelines.
The court dismissed the cross claim against the broker but said that if it were wrong, then the broker should be fixed with the parent’s current liability to the lender because it:
- purported to act as broker for the parents where it had no instructions to do so;
- made no effort to contact the parents to ascertain their knowledge of the true position; and
- sent false material to the lender in support of the applications.
The measure of damages for which the broker’s company would be liable would be the amount that would discharge the indebtedness of the parents to the lender and would result in the discharge of their mortgages.
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