Lenders have rigorous requirements for borrowers and guarantors to receive independent loan advice.
Banks and other lenders routinely require loan transaction guarantors and often borrowers, to obtain “independent loan advice” about the obligations they are undertaking by entering into a proposed transaction.
To evidence the receipt of the advice, they require a solicitor to certify having given it, by way of what is commonly known as an Independent Advice Certificate which certifies certain things.
Who is required to obtain an independent legal advice certificate?
- Borrowers: usually not required in the case of residential loans. In some transactions e.g. those involving cross-collateralisation, the lender may require one or more borrowers to obtain independent advice.
- Company director guarantors: all lenders require that guarantors receive independent legal advice and that a certificate be produced.
- Non-borrower guarantors: all lenders require that guarantors receive independent legal advice and that a certificate be produced.
- Mum & dad guarantors: this is a category of guarantor in which independent legal advice and financial advice should always be obtained regardless of a lender’s requirement
- Trust beneficiary guarantors: usually required where the borrower is a trust
- Company as guarantor: a company is often required to provide a guarantee in its own capacity when the borrower is a trust of which it is the trustee
What are the things that must be certified?
Lender’s requirements vary, but at a minimum, all require a solicitor to provide advice as to the legal obligations that a guarantor will assume and to certify they have explained:
- the general nature and effect of the loan and security documents that the borrower and guarantors are entering into;
- the consequences to the guarantor of a borrower default ie that they are liable to make good the default and pay all arrears and interest from their own funds;
- that in certain circumstances the guarantor can be made to pay even if the borrower escapes liability;
- that the giving of a guarantee involves considerable financial risk and therefore requires they should carefully consider the financial risks involved;
- that they should consider what the risks of the borrower defaulting on repayments are;
- that they should consider their own capacity to make good any default.
The solicitor is also required to confirm that the guarantor and borrower stated they they had read the relevant documents and understood their general nature and effect, as well as the solicitor’s advice and that they were entering into the transaction freely, voluntarily and without pressure.
What are the things a solicitor does not advise on?
Solicitors do not give financial or tax advice and are not in a position to comment on the suitability of the transaction for your particular purposes. Naturally they do not know the borrower’s capacity to meet the loan repayment terms or a guarantor’s capacity to pay in the event of a default. And they have no obligation to enquire about these things.
We know what we are doing, why do we need independent advice?
It’s no secret that lenders require this measure to be taken in respect of most loan transactions because of the increase in disputation by guarantors, i.e. litigation to escape the consequences of a personal guarantee.
Reliance on an independent advice certificate from a solicitor who is not working for the borrower will in most cases prevent the guarantor from later claiming that they had no idea what they were getting into or only provided the guarantee because of pressure from the borrower.
How far does the guarantee advice need to go?
The solicitor needs to understand the nature of the transaction in order to be able to give the advice. The loan document, mortgage document, letter of offer and any other associated documents must be examined and understood so the solicitor can explain the legal effect of the documents in a practical way.
The lender relies on the solicitor having provided the advice to advance the loan funds. By agreeing to provide the advice and provide the certificate, the solicitor takes on an obligation to the guarantor and to the lender. In a way, the solicitor becomes liable to the guarantor if they don’t understand the legal effect of what they are doing and surrenders recourse against the lender.
Can I get my Independent Advice Certificate from Qld Business + Property Lawyers?
Qld Business + Property Lawyers conducts prompt examination of loan and security documents to adequately advise prospective guarantors of the legal obligations, they are contemplating. Advice consultations are conducted in-person – or where permitted, by video link.
Simply enquire online or call 1300 590 613 to arrange a mutually convenient time to meet.
So we are aware of the transaction details in advance, please send us the loan documents once a meeting time has been set.
Where there is more than one guarantor or where a borrower is also required to receive advice, each person will be advised separately.