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.
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 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.
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