In the recent Supreme Court of NSW case, Permanent Trustee
Company Limited v O'Donnell  NSWSC 902, the
financial burden of a fraud on three mortgagors was passed on to
their mortgagee. The mortgagors were able to avoid their
obligations under their mortgage by utilising s7 of the
Contracts Review Act 1980 (NSW).
The fraud involved a mortgage broker falsely recording income
and asset details in loan application forms so that the mortgagors
could obtain LoDoc mortgages to invest in a property development
joint venture with the broker. Two of the three mortgages litigated
were for approximately $500,000 each and the other was for
approximately $400,000. The mortgagors' family homes were
provided as security for each mortgage. The property development
joint ventures were unsuccessful, with the fraud perpetrator taking
all of the funds and the mortgagors having no interest in any
In each case, the mortgagee was completely unaware of the fraud
and the mortgagors admitted they were careless in signing blank or
partially completed loan application forms.
Nevertheless, the court held that the mortgagees should bear the
burden of the fraud. The three key factors in the court's
the fraud perpetrator in its capacity as mortgage broker was
appointed as the agent of the mortgagee;
the loans were approved but without all relevant internal
approval procedures and guidelines being followed; and
the loans amounted to asset lending, as the mortgagors did not
have the capacity to repay the loans.
In the circumstances, the court held that the mortgages were
unjust and that relief should be granted to the mortgagors under s7
of the Contracts Review Act. The relief entailed the
mortgages being declared void, which means that the mortgagees
could not seek to enforce the mortgages to recover the funds loaned
and that the mortgagees could not recover the funds loaned as a
This case sends a clear warning to mortgagees to ensure that
internal policies and procedures are followed in completing loan
applications and to conduct due diligence into the character of any
appointed mortgage broker.
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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