12 December 2006
Key Points:
The failure of a lender to investigate false information provided by the borrower allowed the court to reopen a loan transaction.
On the application of a debtor, mortgagor or guarantor, section 70 of the Consumer Credit Code gives the court power to reopen unjust transactions. The operation of this section was recently considered by the New South Wales Supreme Court in the case of Permanent Mortgages Pty Ltd v Cook [2006] NSWSC 1104. The Court held that despite false documentation provided by the borrower, a mortgage may be unjust where a credit provider was aware, or ought to have been aware, that the borrower was not capable of servicing the loan.
Over a period of ten years, the defendants, the Cooks, had entered into several consecutive loans, using their house as security, in order to refinance previous loan arrangements. The present case related to the latest refinancing arrangement whereby the plaintiff Permanent Mortgages had provided $200,000 which was again secured by a mortgage over the property. The Cooks had engaged a firm of solicitors, Meehan Solicitors, to oversee the transaction and act on their behalf.
The false and incorrect documents
Business or investment purpose declaration
The loan application form required the Cooks to give a yes or no answer to the question "I/We declare that the credit to be provided to me/us by the Credit Provider is to be applied wholly or predominantly for business or investment purposes (or for both purposes)." They answered "no" to the declaration and the form was submitted for approval. Some time after completing the form, the Cooks claimed, their solicitors advised that the declaration was completed incorrectly. The Cooks claimed they were instructed by Meehans to change the answer to "yes" as this was necessary for approval of the loan. Mr Cook made this amendment to the loan documents, knowing it to be incorrect. The agents for the plaintiff queried the change but accepted the "unconvincing" assurance of Meehans that the defendants had simply misunderstood the question and answered incorrectly. The Court found that Mr Cook had knowingly provided the plaintiff with false documentation.
Certification from accountant
As part of the loan arrangement, the Cooks were required to obtain certification from their accountant confirming serviceability and other loan details. The first letter in this regard was rejected by the plaintiff's solicitors because it was not on an accountant's letterhead as required. The second letter, which was signed by a different person, was accepted although the plaintiff's solicitors made no query as to why the accountant had changed. The letter is significant because it certified that the accountant was aware of the Cooks' financial position and believed that they could repay the principal and the interest on the loan, when in fact the Cooks had never met the accountant or provided any material on which to base the certification.
Loan repayment declaration
The Court criticised the plaintiff lender's failure to maintain proper lending standards and procedures which complied with the lender's Lending Procedure Manual. It was accepted that the plaintiff hadn't entirely ignored the requirements in the manual as the Cooks did sign a Loan Repayment Declaration. While this declaration stated the amount of the loan and the instalments, it incorrectly stated the income of the Cooks. The plaintiff did not verify the amount or the source of the income stated in the declaration. The Court heard that Mr Cook had in fact truthfully told Meehans his then weekly earnings and it seemed that Meehans had extrapolated an annual figure from this sum and inserted it in the declaration. This was misleading as Mr Cook's weekly earnings changed from week to week given the casual nature of his work. It seems peculiar, however, that the Court did not question why the Cooks signed an incorrect declaration. More significantly, a further endorsement was written by Meehans on the declaration to the effect that the loan was to pay out a previous loan which was in default.
The loan was unjust under the Code
After the Court found that the loan was for personal, domestic or household purposes and the Code applied, Acting Justice Patten went on to consider whether the subject mortgage was unjust pursuant to section 70. His Honour emphasised that a credit contract could be categorised as unjust "even though there is nothing particularly unjust in its actual terms". While the Court accepted that the false information on the declarations, along with the certification by the accountant, were significant, it was held that these factors were not decisive of the issues under section 70 of the Code.
In order to decide the case, the Court considered the Cooks’ personal factors. The false statements were attributed to their anxiousness to acquire the loan and their weak bargaining position. Ultimately, the Court undertook a balancing exercise. On one side of it, the Cooks spoke English, were experienced borrowers, had the services of a solicitor, were anxious to obtain the loan and were prepared to sign and procure false statements. On the other hand, they were unsophisticated and the Court believed that these were the type of people that were intended to be protected under the Code "from their own foolishness". Given the Cooks’ credit history, particularly the endorsement on the Loan Repayment Declaration relating to the default, the Court decided that the plaintiff was aware or ought to have been aware that they were not capable of servicing the loan. The Court stated that had the plaintiff made even the most perfunctory of inquiries, it would have realised that the Cooks did not have the means to service the loan. As such, the Court held that the loan was unjust.
The plaintiff was ordered to take the defendants back to the position they were in before they entered into the loan agreement with the plaintiff. As the plaintiff had refinanced a previous loan, the Cooks were only liable for the amount that was initially paid by the plaintiffs in order to discharge their debts. The amount the plaintiffs could therefore recover under the writ of possession was reduced. With respect to interest, the loan agreement in its original form provided that interest of 8.8% would apply except where repayments were late, in which case a rate of 13.8% would be imposed. The Court however made an order that interest was to be charged at the lower rate of 8.8%. Furthermore, the Court upheld the plaintiff's judgment in possession but postponed execution for a short period.
Conclusion
In its judgment, the Court referred to the 2006 case of Perpetual Trustees v Khoshaba [2006] NSWCA 41 which concerned the unjust contract provisions under the New South Wales Contracts Review Act. In that case, the borrower provided false and forged documents in order to obtain a loan, the proceeds from which were invested in a scheme similar to a pyramid investment scheme. The lender failed to question the Khoshabas on the purpose of the loan and the court held that the purpose was significant when assessing serviceability. Despite the falsifications, the contract was set aside as unjust on the basis that the lenders had not adequately considered the borrowers' ability to make repayments.
The judgment of Permanent Mortgages v Cook extends the reasoning in Khoshaba to the Code and confirms that credit providers need to show that they have taken further steps to verify the income and servicing capabilities of the borrower. Relying solely on documents supplied by the borrower may not be sufficient to prevent a court finding that a loan is unjust.
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