In Permanent Mortgages Pty Ltd v Michael Robert Cook and Karen Cook [2006]  NSWSC 1104 the NSW Supreme Court declared a loan contract and mortgage unjust, following the decision in Khoshaba.

The borrowers (defendants) executed a mortgage over their home. They were substantially in arrears and the mortgagee (plaintiff) sought possession.

The following quotes set out the distinguishing features of the case:

"78 The public interest is one of the
matters that the court must have regard to under s70. On this issue
over the objection of the Plaintiff, I admitted evidence by Dr Steve
Keen, Associate Professor of Economics and Finance at the University of
Western Sydney.

79 After reviewing the Defendants’
borrowings, for reasons which he gave in a lengthy and detailed report,
he categorised the subject mortgage as evidencing a “Ponzi” loan,
namely one which “can only be repaid by either taking out a larger
subsequent loan, or by selling the asset that was financed using the
loan”. He also described it as a “low doc” loan, that is one where
borrowers self verify their income in the application process. He said
that such loans are:

“designed mainly for the self-employed
or those with irregular income who do not have the documentation
required to obtain a conventional housing loan.”

80 As to the public interest involved in “low doc” and “Ponzi” loans, Professor Keen said:

“(a) Standard home loans are limited
in size by the need for the borrower to establish that he/she can repay
the loan out of income.

(b) Legitimate “Low “Doc Loans” are a
necessary development of income-based loans i

(c) Ponzi Loans are loans that can
only be repaid by either taking out a larger subsequent loan, or by
selling the asset that was financed using the loan.

(d) Ponzi Lending can occur in Low Doc
Loans because the loosening of income-verification standards enables
loans to substantially exceed the size that could be met out of
borrower’s actual income.

(e) The Subject Loan to the Cooks was a Ponzi Loan.

………………………………………….

(g) Were the practice of Ponzi Lending
to become widespread, it would substantially increase the tendency of
the Australian financial system to asset bubbles and subsequent
financial crises, by:

i accelerating the accumulation of excessive debt during the up-swing to an asset bubble;

ii accelerating the rate of decline during the bursting of the bubble; and

iii causing the recovery to take much longer.

(h) Ponzi Loans thus have adverse economic consequences that extend well beyond the immediate parties to the loan agreement.

……

85 Against any public interest in
discouraging loans of the type identified by Professor Keen and Mr
Carraill, there is, of course, a public interest in the enforcement of
contractual obligations freely entered into. In the result, I do not
regard the public interest as of much significance in resolving this
case. Rather, I think the greater focus should be upon factors personal
to the Defendants, or more directly concerned with the particular
transaction…

88 Whether I should hold the mortgage
unjust in this case involves a balancing exercise. On the one hand are
the circumstances that the Defendants speak English as their first
language; were experienced borrowers; had the services of a solicitor;
were extremely anxious to obtain the loan; and were prepared to sign
false statements and procure false certificates. On the other hand, the
beneficial nature of the Code indicates that it was intended to protect
the unsophisticated and meagrely educated, such as the Defendants, from
their own foolishness. Given the means of the Defendants and their
credit history, the Plaintiff, in my view, was aware, or would have
been aware, had it made the most perfunctory of enquiries, that the
Defendants were not capable of servicing the loan even at the lower
rate of interest and could only satisfy their obligations by selling
the mortgaged property for a sum sufficient to cover the principal and
interest. It was likely that they would thus become obligated to pay
interest on the amount of the credit, not at 8.8% p.a., but at the much
higher rate of 13.8%….

92 Undoubtedly, the Defendants were
foolish but, in my opinion, the circumstances of this case constitute
the “something more” contemplated by Basten JA [in Khoshaba], in that the Plaintiff
or its agents who were, or should have been, aware of the foolishness
had, in effect, encouraged it. I am of the opinion that the subject
mortgage and the credit contract, pursuant to which it was given,
should be held to be unjust within s70 of the Code."

According to the IMF’s 2006 Financial System Stability Assessment of Australia, Australia’s financial regulatory and supervisory structure is sound. There is generally a high level of compliance by APRA and ASIC with international standards. Areas for further strengthening are the AML/CFT framework, the capacity of APRA and ASIC, and the framework for the resolution of failed financial institutions and crisis management.

IMF’s findings included:

• The banking system, which holds approximately half of total financial systems assets, is sound, with high earnings, strong asset growth, and low levels of problem assets. Stress tests did not reveal near-term stability concerns, suggesting the banking system is likely to be resilient to adverse shocks.

• The banking system, nevertheless, faces a number of vulnerabilities including (i) macroeconomic shocks; (ii) significant exposure to a highly leveraged household sector; (iii) significant dependence on wholesale funding; (iv) increased competitive pressure; and (v) overall lack of diversification.

KPMG’s Building Societies and Credit Unions Survey 2006 for the period 1 July 2005 – 30 June 2006 has been released.

KPMG concluded that building societies and credit unions are achieving solid growth, however margins are being squeezed.This pressure on margins, combined with continuing regulatory demands which disproportionately increase costs for smaller players, continue to pressure credit unions, particularly the smaller ones, to consolidate. The number of credit unions decreased from 164 to 147 during 2005- 2006 while building societies still numbered 14.

However, further mergers have been announced for 2006/07 and while most consolidation will be friendly, there is potential for hostile takeover activity.

The e-commerce provisions of the Consumer Credit and Trade Measurement Amendment Act 2006 and the Consumer Credit Amendment Regulation (No.1) 2006 commenced on 9 October 2006.

The objectives of the Act in relation to ecommerce:
• facilitate the application of the electronic transactions legislation in each State and Territory to the Consumer Credit Code;
• ensure that consumer protection is not diminished as a result of a debtor transacting in an electronic environment.

In particular amendments have been made to provide for a debtor to specifically consent to receive electronic communications and notices.