A disabled couple has defeated Australia’s biggest non-bank lender in a court battle that saw their $228k home loan and mortgage declared void and unenforceable.
Dale and Faith Burns – both partially blind with “no prospects of employment and nothing to offer but the desire to speculate in real estate” – gained approvals for six property loans totalling more than $840k over eight years from 1999.
The borrower’s investments “proved disastrous” with four loans resulting in forced sales and lender Perpetual Trustees demanding the same fate for a fifth, their owner-occupied residence.
The $228k loan on their Armadale (Perth) home was taken out in November 2007 through Mortgages for Money (broker) from Perpetual (lender) via Challenger Mortgage Management (loan originator). Default occurred in April 2011.
“Who would lend to a couple on disability pensions?” began Justice Eric Heenan in his 65 page ruling scathing of the “exploitation of vulnerable borrowers” by all involved.
Anyone “meeting or dealing with the Burns would immediately realise that each had significant handicaps,” he wrote. Neither of them could understand the significance of the loan applications that they signed.
Their income was principally from a disability pension and rental income was never going to be sufficient to meet interest payments.
Neither did they meet Challenger’s low-doc lending criteria which required applicants to have a current ABN and to derive 100% of their income from their own investment portfolio.
Departing from the conventional view that brokers are the agent of the borrower, the Supreme Court of Western Australia found that Challenger and the broker were agent and sub-agent of the lender – “with express authority from Perpetual to evaluate mortgage applications for the selection of eligible loan applicants”.
That the broker also owed fiduciary duties to the borrower was immaterial.
The use of “special vocabulary” – “trust manager”, “servicer” and “originator” – to describe the relationships could not disguise the “apparent” (or “ostensible”) authority of the protagonists downstream of the lender to make decisions on its behalf.
Perpetual’s documentary disavowal of responsibility or agency for the acts of its contracted functionaries was ineffective. “Private instructions denying or limiting actual authority have no effect where the principal has held out the agent is having authority.”
Perpetual must therefore be regarded as “being aware of the Burns’ particular disabilities, the fragility of their financial position and the absence of any prospect of remunerative employment”. In such circumstances the general rule that lenders owe no duty to provide commercial advice to a borrower, did not apply.
In a ruling that may alter the course of mortgage debt recoveries nation-wide, the court ordered the mortgage and loan were void and unenforceable and ordered Perpetual to discharge the mortgage forthwith.
Likewise each of the five earlier loans and mortgages were declared invalid.
The Burns still owe Perpetual the $228k, and must repay but – because of the unconscionable conduct – only on simple interest terms at the Reserve Bank cash rate. For each of the five earlier loans, Perpetual must likewise refund all interest paid over and above the Reserve Bank rate.
An assessment of the borrower’s further damages as a consequence of Perpetual’s unconscionable conduct will be determined at a further hearing in the coming months.