A private lender’s interest rate of 417% has been ruled to be “utterly crushing” but a court has approved its 70% per annum rate on a $430,000 six-month loan.

Connie Huang and her adult daughter Stephanie Chien applied for a “cash flow funding” loan in October 2019 through a website controlled by broker MaxFunding.

They offered their Burwood residence to which they attributed a value of $3 million as security and disclosed that it had a current $1.5 million mortgage debt to NAB.

MaxFunding referred the loan application to lender Commercial N who approved an advance repayable in 26 weeks with interest at 1.36% per week except when the lender notified in writing that it would accept interest at a lower rate of 0.35% per week.

The borrowers received advice from a local solicitor they had chosen from those suggested in the area by the broker and signed the loan and security documents which also provided that the higher interest rate was payable in all circumstances when the borrower was in default.

The valuation for the property came in late and low – just $2.6 million – resulting in reduction in the amount of the advance from $600k to $430k and denying the borrowers the additional cash they needed to service the interest for the six-month period.

The proceeds were fully deployed to pay out arrears on the NAB loan, clear another short-term $370k loan and meet the lender’s expenses.

When it came time to pay the first interest payment of $6,325 in November, they asked for a deferral and paid it in early December after a default notice had issued.

No further payments were made.

In March 2020 they were advised a payout figure of $530,000.

The lender filed suit in November 2022 to recover the principal and interest of $3.2 million calculated on a monthly compounding basis at the higher rate which annualised at 70.72%.

The borrowers retaliated with a challenge to the higher rate arguing it was as a penalty and therefore void.

The contract provided the higher rate was payable at all times unless notified otherwise and was not one that increases the rate of interest upon failure to make prompt payment.

The lender contented the interest rate provisions thus did not operate to penalise the borrower for breach but rather provided for a ‘concessional’ lower rate whilst ever there has been no default.

Put another way – it argued – the liability to pay interest at the higher rate compounding monthly “does not impose an additional or different contractual liability that arises upon the non-observance of the primary contractual obligation”.

Justice Trish Henry agreed. “The formula provides for an amount of interest that I would readily accept is seemingly extravagant, out of all proportion or unconscionable due to the operation of the capitalisation /compounding factor [but] I am not satisfied that those clauses are unenforceable as contractual penalties,” she decided.

Mrs Huang and Ms Chen also argued the terms were unconscionable having regard to s 12CC(1) of the ASIC Act and s 22(1) of the ACL and should therefore be varied.

The lender had known they were at a ‘special disadvantage’ – they alleged – particularly because Mrs Huang did not speak, read or write English and no translation certificate had been procured for her signing the documents. Further they were both financially experienced and the security documents were long and complicated.

They also submitted that a reasonable lender would have known they were certain to have defaulted once the advance was reduced and there were no surplus funds to pay interest while their exit strategy was put in place.

Justice Henry observed that an “unconscionability” finding requires more the mere breach of accepted standards of commercial behaviour and more than mere element of hardship or unfairness.

Rather, she explained “it requires conduct that is characterised by a substantial departure from that which is generally acceptable commercial behaviour that is so plainly or obviously contrary to what is expected, that it is offensive”.

The judge agreed that Mrs Huang’s inadequate English seriously affected her ability to make a judgement as to her own best interests and she therefore suffered a special disadvantage but concluded the loan was not unconscionable on that ground given there was “no doubt” both borrowers “understood the risk of not meeting their obligations to repay loan monies, particularly where secured by a registered mortgage against their residence”.

Neither was the “very high” 70.72% annual interest rate unconscionable in the absence of expert evidence stating same to be “excessive or even unusual in the context of a short-term financing by way of a second mortgage”.

That said, monthly capitalisation that lead to total interest of $3.2 million at an effective annual rate of about 417% “could never be said to be reasonably necessary for the protection of legitimate interests [and] is utterly crushing”.

She declared the monthly capitalisation provision to be void by reason of its unconscionability and ordered the interest to be calculated on a simple basis at 70.72% p.a. totalling $882k.

Commercial N Pty Limited v Huang & Ors [2024] NSWSC 23 Henry J, 31 January 2024


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