In June 2022 Steve Saad borrowed $60,000 – including loan establishment fees and legals – from a private lender and entered into a loan agreement that required repayment in full within 2 months.

An additional amount was advanced by lender First Cash Flow Solutions the following month to bring the total principal up to $86,000.

Court declares 95% of lender's fees to be penalty chargesInterest – for on time weekly payments – was at the “lower” rate of 2.15% per month but escalated to the “base” rate of 4.00% per month if overdue. Arrears were capitalised and attracted interest at the higher “base” rate.

The agreement specified a raft of other charges including a $33 monthly administration fee and a payment default fee of $1,100 if sums were not received by “within 48 hours of the due date for payment”.

The breach of any of the several banking covenants – whether of trivial or serious consequence to the lender – triggered other obligations.

At the same time as signing up the loan agreement and a second mortgage over his home as security, Saad executed two documents waiving the right to take legal advice and to take financial advice.

The borrower made his first two interest payments but thereafter went into default prompting First Cash’s termination of the arrangement in August 2022.

It thereafter notified Saad he was obliged to pay additional fees by reason of the default including a “risk fee” of 2% per month on the total outstanding and a default management fee of $440 per week.

After NAB sold up the property for $870,000 in April 2023, the amount left to satisfy First Cash’s second mortgage was some $14,000.

It filed a summons in November 2022 to recover $142,395 which – by the time the matter came before Justice Stephen Robb in the NSW Supreme Court in May 2023 – had ballooned to $222,200 and included $136,000 in interest and charges.

Notwithstanding Saad had filed no defence and did not appear at the hearing, Justice Robb required First Cash to justify its claim and to overcome the presumption that the weekly default fee – because it imposed on the borrower same cost for both serious and trivial breaches – was a penalty.

While the judge was not prepared to interfere with or criticise the rates of agreed interest, he was concerned with numerous default fees claimed for each week up to judgement.

He noted that the weekly interest at the “lower” rate was $428 and that same escalated to $797 on default by reference to the “base” rate. But with the additional $1,100/week payment default fee, the weekly impost rose to $1,896.

This was in his view “extravagant or out of all proportion to, or unconscionable” in comparison with the damage that might be anticipated to follow from the breach.

The lender’s additional administrative overhead was – after all – already compensated by the right to capitalise unpaid interest and the borrower’s indemnity for all losses.

The payment default fee thus were unenforceable penalty charges.

And because the “risk fee” and “default management fee” were sought to be imposed after the loan agreement had been terminated by the lender, they too were unrecoverable. His Honour left open the question as to whether those fees also constituted penalty charges.

The disallowed charges were payment default fees of $57,200; “risk” fees of $15,600; and default management fees of $17,200.

First Cash was restricted in its recovery to a total of $132,000 – $90,000 less than the sum claimed – which includes just $4,000 of administrative etc charges after principal and interest.

First Cash Flow Solutions Pty Ltd v Saad [2023] NSWSC 686 Robb J, 22 June 2023 Read case


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