The "classic" case on the question of unconscionable conduct by a lender is Amadio (1983, High Court). In the current world of "no-doc" and "lo-doc" loans and security lending without regard to a borrower’s capacity to pay, we can now add Perpetual Trustee
Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41 as an important case on unjust loans. Even though it was decided under the NSW Contracts Review Act it has general application.
Facts
Mr and Mrs Khoshaba are pensioners and members of the Assyrian community in Sydney. In late 2000 they decided to invest in a trolley-collecting business (which turned out to be a pyramid scheme).
They were referred by the business operator to Combined Home Loans Pty Ltd (“CHL”). CHL submitted a loan application to Australian Mortgage Wholesalers Pty Ltd (“AMW”), whose role it was to assess the application on the Perpetual Trustee’s behalf in accordance with specified Guidelines.
The loan application, initially submitted in Mr Khoshaba’s name alone, was deficient in several respects. It falsely described Mr Khoshaba as being employed and earning a salary of $43,000. The trial judge found that Mr Khoshaba had no knowledge that this information had been submitted to the lender. Furthermore, that part of the application that inquired as to the purpose of the loan was left unanswered. After it had been submitted, the loan application was amended to include Mrs Khoshaba as a joint
applicant. The trial judge found that her signature on the form had been forged.
Pursuant to the guidelines, AMW was required to verify the employment and income position of the applicants. The Guidelines also required that full details of the purpose of the loan be given. In neither respect were the Guidelines followed.
In February 2001 Perpetual Trustee, as trustee for a securitised mortgage programme, lent the Khoshabas $120,000 and took a first mortgage over their family home (the ‘Loan Agreement’). The Khoshabas forwarded $100,000 of these monies to their daughter, who invested them in the business (the ‘Investment Agreement’).
The trial judge
found that Perpetual Trustee had no knowledge of the Investment Agreement, and that
it had no involvement in falsifying the loan application. There is no suggestion that Perpetual Trustee or anyone acting on its behalf played any role in inducing the Khoshabas to enter into the Investment Agreement. Nor was there any suggestion
that the Perpetual Trusteet or anyone acting on its behalf had any information about the
investment proposed or its risks and possible returns.
The business collapsed leaving the Khoshabas without the expected flow of revenue and a debt of $87,572. They sought relief
from the Loan Agreement pursuant to the Contracts Review Act 1980 .
The trial judge found the Loan Agreement to be unjust for
two principal reasons:
-
Perpetual Trustee’s failure, contrary to
prudent lending practice, to follow its own lending guidelines in assessing Mr and Mrs Khoshaba’s loan application; and
- Perpetual Trustee’s
failure to recommend to Mr and Mrs Khoshaba that they receive independent legal or
accounting advice.
The Appeal decision
In rejecting the lender’s appeal, the NSW Court of Appeal found that the fact of departure from the
guidelines was a relevant consideration in the determination of
‘justness’. But where the departure from the Guidelines is not
evidence of departure from prudent lending practice or normal
and appropriate lending practice it is not decisive.
In this case departure from the
guidelines was however held to be a relevant circumstance: if the Guidelines had been observed the loan would not have been made.
The court took particular note of one departure from Guidelines: the section
of the standard form application about the purpose of the loan was left blank.
"This indicates that… the Appellant
“was content to lend on the value of the security”. In my opinion,
that approach is entitled to significant weight in the determination of
unjustness….
On the information actually available
to the Appellant, a husband and wife – one with a $43,000 per annum income
and the other a pensioner – borrowed $120,000 for, as far as the Appellant
cared to know, immediate expenditure. Enforcing a security against the personal
residence of such borrowers should not be treated as if it were the first
resort. That is what, on paper, the Appellant can be described as having done…
The fact that the lender was willing to lend on the value of the
security alone, and was indifferent to the purpose of the loan, is entitled to
significant weight in the determination of unjustness."
"Had the
Appellant or its representatives made any inquiries about the purpose of the
loan I would have allowed the appeal. I do not mean to suggest that the
Appellant had to determine that the proposed investment was reasonable and
capable of servicing the loan. It is the indifference, suggesting that the
Appellant was content to proceed on the basis of enforcing the security, which I
find determinative."
This was a decision based on the facts but it gives some guidance on the court’s view of the obligation of lenders.
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Posted 23rd July 2006
by David Jacobson
in Financial Services
