Australia: If All Else Fails, The Property Can Be Sold, Right?

Last Updated: 20 July 2006
Article by Charles Cowper

A borrower who signed a loan application that falsely recorded his income has successfully appealed to have his loan contract and mortgage set aside. He had borrowed the money, using his family home as security, to invest in the failed business ran by Karl Suleman.

The NSW Court of Appeal decision – handed down yesterday – highlights the risks faced by a lender who fails to properly assess a borrower’s capacity to repay the loan, and nevertheless proceeds with the loan and takes security.

The Loan Application

In late 2000, Mr & Mrs Khoshaba decided to borrow money to invest in Karl Suleman Enterprises (KSE).

The Khoshabas, with the assistance of their broker, completed a loan application form.

Mr Khoshaba signed the loan application without reading it. The loan application falsely recorded that Mr Khoshaba was a courier driver earning $43,000 per annum. The loan application attached a letter from Mr Khoshaba’s supposed employer and employment payslips – both these documents were discovered at the time of the hearing to be forged by persons unknown. It was also discovered that Mrs Khoshaba’s signature had been forged.

The broker submitted the loan application, employer letter and payslips to a mortgage introducer. The introducer collated other records, such as a valuation and credit reference checks, before sending the application and supporting records to the lender.

The mortgage introducer was obliged to comply with the lender’s guidelines for loan introduction and management. These guidelines required the mortgage introducer to verify the income stated in the loan application by phoning both the loan applicant and the employer.

The mortgage introducer failed to verify the income as required by the guidelines. In further breach of the guidelines, the loan application did not disclose the purpose of the loan.

At the time of the application, the borrowers were, in fact, pensioners.

The borrowers understood the nature of the transaction, namely that they were borrowing money to invest in KSE, secured against their family home. Further, their investment decision was made independently of the lender.

The borrowers lost money on their investment in KSE.

In August 2003 the borrowers commenced proceedings against the lender in the District Court, seeking relief under the Contracts Review Act.

The Decision at First Instance

The trial judge found that the loan agreement and mortgage were unjust because the lender failed:

  • to follow its own lending guidelines in assessing the loan application (contrary to prudent lending practices); and
  • to recommend to the borrowers that they obtain independent legal advice.

The Court of Appeal Decision

The Court of Appeal overturned the trial judge’s findings in both respects.

In relation to the former, the Court of Appeal found that it was not open to the trial judge to conclude that the lender’s own internal guidelines should set the benchmark for what constitutes prudent lending practices.

In relation to the latter, the Court of Appeal distinguished between the loan and the KSE investment agreement. The Court found that a lender’s failure to recommend that a borrower take advice on an investment should be afforded little or no weight when considering whether the lender’s conduct was unjust.

The Court of Appeal proceeded to inquire whether there were any other grounds for concluding that the circumstances surrounding the loan application were unjust.

The Court of Appeal held that there were.

In particular, the Court found that it was unjust for a lender to be solely focused on the loan security as being the means by which a loan, secured against a family home, would be repaid. The Court inferred that, in this instance, the lender was solely focused on the loan security to repay the loan because the lender (through the mortgage originator who had been appointed to carry out these tasks):

  • had failed to ascertain the loan purpose; and
  • had failed to verify that the income attributed to the loan applicants in the loan application was correct.

Both these failings indicated to the Court of Appeal that the lender was not concerned with whether the borrowers could afford to repay the loan, but rather was solely concerned with whether the value of the property security was enough to repay the debt.

The Court of Appeal drew this inference despite:

  • the existence of documentation (payslips and a letter from the employer) that on its face supported the income recorded in the loan application; and
  • the lender being let down by a mortgagor originator, who had failed to carry out the verification tasks that were prescribed in the lender’s own guidelines.

Implications for Lenders

The judgment is of particular concern for "low-doc" lenders.

The decision means that lenders who choose not to (or fail to) properly assess the credit of a loan applicant, may lose the benefit of any security taken for the loan, particularly in circumstances where:

  • had the credit been properly assessed, it would have become apparent that the borrower(s) could not afford the loan; and
  • the security in question comprises of a mortgage over the family home.

Unfortunately the judgment contains no guidance for lenders on what steps are sufficient to verify income ascribed to borrowers in loan applications. The fact that the lender had not complied with its own guidelines was sufficient for the Court of Appeal, in this instance, to draw a negative conclusion.
By Justin Bates, Sydney.

Sydney

Justin Bates

t (02) 9931 4763

e jbates@nsw.gadens.com.au

Campbell Hudson

t (02) 9931 4957

e chudson@nsw.gadens.com.au

Melbourne

Simon Wallace

t (03) 9252 2521

e swallace@vic.gadens.com.au

Peter Grotjan

t (03) 9617 8538

e pgrotjan@vic.gadens.com.au

This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.