Case Studies

Case study | Unjust transaction

Facts of the case

In 2007, a husband and wife (
the consumers) entered into a loan agreement with the lender.  The loan was secured by a registered mortgage on the consumers’ home. Upon settlement, the loan funds were distributed to the consumers’ son for his business.

While payments were maintained for some time, the loan ultimately fell into default and the lender took steps to recover the outstanding balance.

The consumers, who are from a non-English speaking background, claimed that the transaction had been arranged by a mortgage broker and their son for their son’s business, and that they required a translator and did not understand that they were entering into a loan agreement.

As a result they argued that the lender acted inappropriately by entering into the loan agreement with them. The lender rejected the claim.

We first considered whether the National Credit Code applied to the loan.  Although the consumers had signed a business purpose declaration, we were satisfied that the actual purpose of the loan was personal, being to help their son. We considered that the mortgage broker who obtained the declaration knew that the loan was predominantly for personal purposes and accordingly, we considered that the declaration was ineffective. 

The information made available to us showed that, at the time they entered into the loan agreement:

  • the consumers were aged 75 and 67,
  • they were born in Greece and required a translator to communicate in English,
  • they did not have the capacity to understand the nature of the transaction and risks associated with entering into the loan agreement,
  • the loan application incorrectly stated that the consumers were self-employed cleaners, when in fact they were reliant on the aged pension and did not have the income required to meet the monthly loan repayments,
  • the lender did not comply with its lending guidelines which required it to confirm details of the stated employment, suggesting that it was content to rely on the value of the mortgaged property, and
  • the consumers did not receive any benefit of the loan funds, which were disbursed by the lender directly to the son’s business.

The consumers’ son made all repayments on the loan until 2014, when his business began to fail.  The consumers only became aware that they were the borrowers on the loan when they received a default notice from the lender.

Our Position 

In view of the overall circumstances, we considered that the loan was an unjust transaction pursuant to section 76 of the National Credit Code. 

We provided the lender with a preliminary review of our findings and asked the lender whether it would be willing to waive the outstanding loan balance in full, release the consumers from any further obligations associated with the loan and discharge the registered mortgage on the consumers’ home.

The Resolution

The lender agreed to this resolution and waived the outstanding amount owed on the loan, which was approximately $240,000, and took the appropriate steps to remove the mortgage registered on the consumers’ home.

Case study | Responsible lending
Facts of the case
From March 2011 onwards, Ms M engaged a broker who arranged 14 loans for her with the same small amount lender.
The question arose whether the broker and lender had complied with their responsible lending obligations under the National Consumer Credit Protection Act 2009 (Cth) (NCCP).
Our preliminary review of the complaint was that they had not. The information available to us showed that Ms M could not have met her financial obligations under the loans. In particular:
  1. Both the broker and lender were unable to provide us with any information which showed that they had made reasonable enquiries about Ms M’s financial situation before each loan was entered into. 

    The lender also informed us that its procedure at the time was that a new loan application was only required to be completed once every six months. 

    The previous loan application would be relied on for any new loan applications. In Ms M’s case, only two loan applications were completed for 14 loans. As such, we considered that the lender did not make reasonable inquires about her financial situation at the time she applied for each loan.
  2. Both the broker and lender were unable to provide us with any information which showed that reasonable steps were taken to verify her financial situation.  

    Around the time that Ms M entered into the loans, her bank account statements disclosed that she had approximately four other small amount loans. We also understood that Ms M was a single parent with three dependent children. 

    There was no information which indicated that either the broker or lender turned their mind to Ms M’s other debt obligations and the cost of Ms M’s general living expenses when verifying and assessing Ms M’s financial situation at the time she applied for each loan.
Our Position
Our preliminary review found that the loans were unsuitable. The broker should not have assisted and the lender should not have provided the loans to Ms M.  Consequently, we made a formal written Recommendation that any interest, fees and charges, less any principal amount outstanding for each loan be either waived and/or refunded.
The Resolution 
All the parties agreed to our Recommendation and Ms M received a refund of $2,000.
Case study | Delayed settlement No.3
Facts of the case

Ms C had an investment loan with a lender. She decided to refinance her loan with a new lender who was offering a fixed interest rate of 6.99% p.a. for a term of three years. She paid for a ‘rate lock agreement’ which secured the fixed interest rate of 6.99% p.a. for three months pending settlement of the loan.
The new lender sent a discharge request to Ms C’s current lender so that they could prepare the discharge of Ms C’s existing loan. The current lender then instructed their solicitors to prepare for settlement.
Due to the solicitors for the existing lender misplacing the security packet (which contained the title to the security property), the refinance could not take place and settlement was delayed for over a month, by which time Ms C’s rate lock agreement had expired.
Eventually, the solicitors located the security packet and the refinance took place. Unfortunately, by this time the fixed interest rate applying on Ms C’s new loan had risen to 7.29% p.a., and the 6.99% p.a. rate was no longer available.

Our Position

We considered that if the lender’s solicitors had not misplaced the security packet, Ms C would have been able to refinance her loan at a fixed interest rate of 6.99% p.a. rather than at 7.29% p.a.

The Resolution 
Although the lender initially tried to argue that some responsibility rested with Ms C in proceeding with the higher fixed interest rate, they ultimately offered to refund the approximate difference in interest on the new loan over the three year fixed rate period as well as an additional $500. Ms C accepted the offer in resolution of her complaint.


Case study | Timeshare financier and enforcement costs
Facts of the case
Mr and Mrs L entered into a loan with a financier to fund 20,000 vacation credits purchased with a timeshare provider. A year later, Mr and Mrs L began to experience difficulties in making the scheduled monthly loan repayments and eventually defaulted on their loan.
The financier sent a default notice to both Mr and Mrs L individually. When Mr and Mrs L did not comply with the default notice, the financier took possession of and sold the vacation credits. The financier later wrote to Mr and Mrs L and provided them with the following information:
Mr and Mrs L owed the financier $9,000, the financier had received $10,000 from the sale of the vacation credits, they had incurred enforcement costs totalling $6,000, after deducting the enforcement costs from the sale price, Mr and Mrs L remained liable to repay the shortfall amount of $5,000.
Sometime later, the financier listed a default on Mr and Mrs L’s credit files for an overdue amount of $5,000.

Complainants’ Position
Mr and Mrs L made the following claims against the financier:
  • the financier deducted unreasonable enforcement costs from the sale of the vacation credits, and
  • the financier did not provide an itemised account of the enforcement costs.
The financier failed to produce any documentation that would enable us to verify the amount the financier said they received from the sale of the vacation credits or the enforcement costs they said they incurred.

Our Position
Consequently, we issued a formal written Recommendation which found that the financier was not able to demonstrate that they incurred any enforcement expenses in relation to the sale of the vacation credits. Accordingly, if the FSP had sold the vacation credits for $10,000 and did not incur any enforcement expenses, the gross sale proceeds should have been applied as follows:
  • to discharge Mr and Mrs L’s outstanding debt (which at the time of sale totalled $9,000), and 
  • the remaining $1,000 ought to have been remitted to them.
To resolve the complaint, CIO recommended that the financier:
  • pay to Mr and Mrs L $1,000 plus interest, and
  • remove the defaults listed on their credit files.
Mr and Mrs L accepted our Recommendation; however the financier did not. Consequently, the complaint was referred to the Ombudsman for
Determination. The Ombudsman reviewed the complaint and came to the same conclusion.

The Resolution 
As a result of the Determination, the financier paid Mr and Mrs L $1,000 plus interest and removed the defaults listed on their credit files.
Case study | Payment arrangement ordered
Facts of the case

When Ms K separated from her husband, she stayed in their home with her three children. Mr K moved out and stopped making payments to the home loan. Ms K worked part time and could not afford to make the loan payments on her own. As a result, the loan fell into arrears.
During this time, Ms K and the lender were in continuous discussion about different payment arrangements to give Ms K time to settle her property matters with Mr K in the Family Court.
After some time, Ms K entered into consent orders with Mr K. Under the consent orders, Ms K would refinance the home loan and Mr K would transfer his share of their home to her. Alternatively, Ms K would sell the home.
Soon after, Ms K obtained a second job and began meeting her full mortgage payment obligations. However, she was not in a position to pay the arrears which had accumulated on the loan.
With the consent orders in place, Ms K applied to the lender to capitalise the arrears on the loan.

Financial Services Provider’s Position
The lender declined Ms K’s request because they believed that her request was inconsistent with the consent orders.
The lender also informed us that the mortgage insurer did not agree to capitalise the arrears.
Ms K provided us with account statements and payslips to show that she was making her mortgage payments and she was able to make the future payments. In addition, she informed us that she wanted to refinance the loan but could not do so because her loan statements indicated that she was in default of her loan obligations.

Our Position
We informed the lender that we considered that it was reasonable for them to capitalise the arrears on the loan and recommended that they did so. We did not consider that the lender was a party to the consent orders and so would not be seen to be breaching its terms if they agreed to capitalise the arrears. Indeed, Ms K was not able to refinance unless the lender capitalised the arrears on the loan.
In addition, Ms K was able to show that she could meet her payment obligations under the loan if the arrears were capitalised. We referred the lender to the National Credit Code which makes no reference to mortgage insurance as a relevant consideration when assessing hardship applications.
The Resolution
The lender did not agree with our recommendation. Consequently, the Ombudsman issued an Order requiring the lender to capitalise the arrears on the loan.
Case study | Payment arrangement with a lender
Facts of the case

Ms P became unemployed and started to fall behind on her mortgage repayments. She remained unemployed for some time and the lender started legal proceedings for possession of her home.
At around the time the lender was granted default judgment for possession, Ms P found a new job, began making her minimum monthly repayments and made an application for the early release of superannuation to pay off the arrears.

Complainant's Position
Ms P made a complaint to us asking for time for her application to be processed to pay off the arrears. However, by this time, the lender had instructed the sheriff and she was required to vacate her home in a few weeks.
Our Position
Under normal circumstances, we would not have been able to provide Ms P with more time to pay out the arrears. This is because the lender had obtained a court order for possession and we cannot overturn or vary a court order.
However, Ms P informed us that she was a single mother with three children and needed more time to vacate the property. In these circumstances, we recommended that the lender stay the eviction and not reschedule it for a period of two weeks on the ground of personal hardship. The lender agreed to do so.
During this time, we also discussed Ms P’s current financial circumstances with the lender. The lender later agreed that as long as all the arrears were paid and the repayments were kept up to date going forward, they would not enforce the judgment for possession by requesting full payment of the debt.

The Resolution 
Ms P later received the early release of her superannuation and cleared her arrears.
Case study | Payment arrangement with a car financier
Facts of the case

When Mrs C was made redundant, Mr and Mrs C were still able to meet their car lease payments with the help of their savings. However, when three months had passed and Mrs C was still not able to find a new job, Mr and Mrs C started to fall behind on their car lease payments.
When Mr and Mrs C approached us for help, Mr C initially wanted to make additional payments on top of the normal lease payments to catch up on the overdue payments. We sent Mr and Mrs C our hardship application questionnaire so Mr and Mrs C could provide us with information about Mr C’s current income, Mr and Mrs C’s expenses and a realistic indication of what they could afford.
Mr C stated that he could afford $850 per fortnight, which was more than their fortnightly lease payments. The increased payments would enable Mr C to catch up on the overdue payments over the term of the lease.
Mr and Mrs C’s hardship application questionnaire indicated that they had many debts, including a home loan. After the mortgage payments were made, they did not have enough income left to meet their lease payments let alone the higher payments Mr C was proposing to make. On this basis, the car financier declined their hardship application.
Mr C informed us that they were in the process of selling their home and this would leave the car financier as the only remaining creditor. 
Our Position
We considered that Mr and Mrs C’s proposal was reasonable because they were able to show that they could afford to make the higher payments.

The Resolution 
After some negotiation, the car financier agreed to accept their proposal to make the increased lease payments until the end of the lease contract.
Case study | Break cost fees
Facts of the case

Mr C applied to his lender to fix the interest rate on his existing loan for a period of five years. Two years later, the variable interest rate started to fall and Mr C approached the lender and asked them what the break cost fee would be if he were to convert his loan back to a variable interest rate.
At that time, Mr C questioned the break cost fee formula that was disclosed in the contract. He said that the break cost fee formula was either incomplete or incorrect because the lender was unable to calculate the break cost fee. Consequently, Mr C requested that the break cost fee be waived.

The Resolution 
We agreed with Mr C and negotiated a favourable outcome for him. He was able to convert his loan to a variable rate loan without incurring the break cost fee. The lender also credited the difference in the interest from the time Mr C wanted to convert his loan and to when the lender actually converted his loan.
Case study | Credit defaults
Facts of the case

When Ms J separated from her husband, she contacted the credit card provider to inform them of this and to close her account. As far as she was aware, the account was closed.
Ms J later checked her credit file and noticed a payment default for the non-payment of an outstanding debt from a joint credit card account issued by the credit card provider. The information on her credit file indicated that the debt had been assigned to a debt purchaser.
In her complaint to CIO, Ms J told us that she did not receive any statements or notices about the outstanding debt or that a payment default may be recorded on her credit file. When she raised her complaint with the original credit card provider, she was told that all the transactions for the outstanding debt were made by her ex-husband who was a joint account holder. She had not completed a release of liability form so she was jointly and severally liable for the outstanding debt.

Complainant's Position
Ms J wanted the payment default removed from her credit file and not to be made responsible for the outstanding debt.
During our investigation of the complaint, we noted that the original credit card provider’s file notes referred to Ms J’s ex-husband as the primary account holder and all the notices had been sent to him. Ms J could not recall whether she had applied to be a joint account holder or whether she was an additional card holder.

Our Position
We asked the debt purchaser to provide us with information to show that Ms J was a joint account holder, for instance, the credit card application form, statements, notices or other file notes. However, the debt purchaser was not able to provide us with any information to confirm this.

The Resolution 
For this reason and because the outstanding debt was incurred by Ms J’s ex-husband after the credit provider was told of their separation, we recommended to the debt purchaser that they not pursue Ms J for the debt and to remove any payment defaults recorded on her credit file. The debt purchaser agreed.
Case study | Motor vehicle repossessions
Facts of the case

Mr V’s business was not doing very well and he fell behind on his business car loan.
When the lender’s agent came with a tow truck driver to repossess the car, Mr V asked the agent for a copy of the court order allowing the agent to repossess his car. The agent told Mr V that he did not have one. Mr V asked the agent and the tow truck driver to leave his property, however, the agent stayed on the property and the tow truck driver towed the car from Mr V’s driveway.

Complainants’ Position
Mr V made a complaint to us asking for the return of the car and the chance to sell the car himself privately. He said that the lender did not have a court order and repossessed the car from his home without his consent.
Financial Services Provider’s Position
The lender disagreed, stating that Mr V’s contract included a term where Mr V gave his consent for the lender to enter Mr V’s property to repossess the car.
Our Position
Our position was that, even if Mr V had given the lender or their agent consent to enter his property to repossess the car, he could withdraw his consent at any time. When the agent and the tow truck driver refused to leave his property despite being asked to, we considered that they were trespassing on Mr V’s property.
In view of the above, we made a formal written Recommendation that the lender:
  • return the car to Mr V,
  • reverse all the costs related to the repossession, and
  • reverse any interest charged between the date of repossession and the date the car was returned (given that Mr V had not had the use of the car during that time).
The Resolution 
The lender eventually accepted our Recommendation and also Mr V’s request for time to sell the car himself.


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