The extent to which a lender may be liable for the conduct of an
intermediary is open to doubt. The Supreme Court of Victoria found
a lender liable for the conduct of a mortgage originator. The
decision follows a Supreme Court of New South Wales decision in
which the lender was found liable for the conduct of a finance
broker (on the basis that it was the agent of the mortgage manager
and the lender) and a Supreme Court of Western Australia decision
in which a mortgage aggregator was found to have acted as the
lender's agent and its knowledge was attributed to the lender.
The result of all three decisions was that the loans and mortgages
were set aside.
The Victorian case
The borrower signed "lo doc" loan application
documents, which contained false information, without reading them.
His only contact was with a conman who the court found must have
had an association with the finance broker, Medallion, who
submitted the loan application to the mortgage originator, Violet
Home Loans Australia (VHLA).
The critical issue in the case was whether VHLA was the agent of
the lender (Perpetual), notwithstanding the terms
of the Mortgage Origination Agreement (MOA) which
described VHLA as a mortgage manager and attempted to characterise
VHLA as an independent contractor.
The court examined the dealings and contractual arrangements
during the loan application process and the manner in which the
loan was managed after settlement. The following factors meant the
court found VHLA was Perpetual's agent:
the terms of the loan contract showed that Perpetual's
relationship with the borrower was managed exclusively by VHLA
(both before and after settlement)
by the terms of the MOA, Perpetual dictated the precise manner
in which VHLA was to deal with borrowers and VHLA was required to
comply with directions given by Perpetual (demonstrating control by
Perpetual over VHLA, inconsistent with a principal and principal
The court found VHLA acted unconscionably in circumstances
VHLA knew that there were irregularities and "fudged"
figures in the loan application and income declaration but made no
VHLA knew that neither it nor Medallion had personally
interviewed the borrower
VHLA knew that the borrower was in his mid sixties and the loan
was to be secured by his only real asset, his home.
In processing the loan, VHLA was acting as Perpetual's agent
and Perpetual was therefore liable for VHLA's unconscionable
The three Supreme Court decisions give scope to borrowers to
successfully defend claims by lenders. These decisions should
prompt lenders to review their documentation and dealings with
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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