In April 2007 Steve and Iris Karamihos re-financed their Maroubra home with a $1.2 million loan through a finance broker with Bendigo bank.

The loan, via a mortgage manager for the bank, Mortgageport,  was said to be for capital for their Marrickville restaurant business that they had successfully operated for 27 years after their arrival in Sydney as Greek immigrants.

Bendigo “overrode” its loan age restriction policy – the borrowers were both in their 70s with obviously no prospect of repayment from recurring income during the 25 year term of the loan.

Defaults in the monthly repayments of $7.5k began in December 2008.

To accommodate Iris’s ill-health, they leased the restaurant to a “highly recommended” operator who defaulted when it became time to pay full rent in just the third month of the term. They lost their  right of recourse against the tenant because Pepetual – as mortgage manager for Australian Unity – declined to grant consent to the lease due in part to the tenancy default at the time it processed the request.

Bendigo commenced proceedings for  recovery of possession of Steve and Iris’s Maroubra home.

In their defence, the borrowers’ contended  that the loan contract and mortgage over their home were unjust for the purposes of the National Credit Code (“the Code”) and the NSW Contracts Review Act 1980.

The lower court had ruled the loan contract was “unjust” under the Code and the CRA  because it was “a bridge too far, at too late a stage in their fast-fading lives” and because the credit officer’s failure to verify the customers’ estimate of  $2 million net assets “was unreasonable, to put it at its lowest”.

It ordered that the borrowers be relieved of their liability to the Bank, other than in respect of that portion of the loan that was used to pay out the existing loan, a benefit to them of about $250k.

On appeal, the appeal judges considered the CRA was obviously applicable regardless of the purpose to which the loan funds were put. It declined to decide however whether the Code was inapplicable “because credit provided to the borrowers was not wholly or predominantly for personal domestic or household purposes”.

Such ruling was not required, it decided, because the remedy available to borrowers under the two schemes was not “materially different”.

The NSW Court of Appeal did not accept that Steve and Iris’s estimate of their net assets was erroneous. Thus the bank’s “neglect” to check its accuracy “could not bear on the justness or otherwise of the loan contract or mortgage”.

There were, according to the appeal judges, no other factors that warranted the conclusion that the loan was unjust.

The circumstances of prior loans were “as consistent with financial maturity as the converse”. The absence of independent legal or financial advice was not significant because “it was not demonstrated that financial advice would have recommended against the borrowing”. Finally, the fact that they were in their early 70s “did not in itself indicate an inability to protect their own interests”.

The earlier ruling in the borrowers was overturned and Bendigo can now recover the entire debt.

Bendigo and Adelaide Bank Ltd v Karamihos [2014] NSWCA 17
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