Unemployed re-fi borrowers – who were happy for their mortgage broker to mis-state loan application income – must give up their Currumbin Valley home after the Supreme Court last week exonerated the lender of any misconduct in its loan approval process.
Garry Moon told the court that he had suffered financial misfortune as a result his partner’s mis-deeds, stripping him of a furniture business and leaving him to carry a $465k debt to Bank West.
In 2006 he took out a 36% p.a. $125k private loan to cover the Bank West interest. In 2007 he engaged a mortgage broker to source consolidation finance, ultimately provided by Secure Funding Pty Ltd of Melbourne, where I am writing this post.
Moon completed several income statements in which he referred to his occupation as self-employed furniture manufacturer and an annual income of $115k.
In February 2009 the borrowers rented the home to a third party and then stopped payments in April that year.
Self-represented at the trial before the Supreme Court, the Moons resisted the lender’s demand for recovery of possession of the home and claimed that the broker had completed the false finance declaration, after they had signed it in blank.
The court rejected Moon’s version of events. Given that the “evidence demonstrates that he was prepared to be dishonest to obtain a loan”, his other claims could not be considered truthful.
Even so, the borrowers contended both the lender and broker owed duties to enquire as to their ability to service the loan. Had this occurred, the loan would not have been approved and never made. This duty breached, they claimed, the transaction was liable to be “set aside”.
Not so said the court.
For starters, as a broker is the agent of the borrower, a lender can not be visited with any sins of the broker.
Second, neither the broker nor for that matter, the lender, had done anything wrong.
“A lender does not owe a borrower a duty to give commercial advice or to investigate the ability …. to make repayments on the loan or verify information provided by the borrower”.
“It would be remarkable if a lender owed a duty to borrower to investigate an untrue statement about income for which statement the borrower was dishonestly responsible.”
Given the desperation of investors wrong-footed by the GFC and the credit crunch, these issues are likely to be exposed to further court examination.
This ruling did not address Competition and Consumer Act relief provisions nor those contained in the ASIC Act and elsewhere. Nor did it consider the issue of loan contract “penalties” which now seems a good bet to reach appellate level for re-consideration in the near future.