Unjust loans: the role of the lender

In Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41, the borrowers sought relief from their obligations under their loan contract. They were successful. Departure by the loan manager from the loan guidelines was a relevant consideration in the determination of ‘justness’.

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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Privacy case notes

The Privacy Commissioner, Karen Curtis, has released case notes relating to personal information handled by a banking institution and a credit provider:

• In U v Banking Institution [2006] PrivCmrA 20, the complainant and their spouse had entered into a loan with a banking institution. After moving addresses, the couple contacted the institution to update their details. However, the banking institution sent the next statement addressed to one of them (the complainant) at their old address. The complainant and their spouse telephoned the banking institution on several occasions, alerting them to their updated contact details. Despite this, some months later the banking institution sent loan default notices to the old address, with the word 'default' visible through the plastic window of the envelope.

  The complainant complained to the banking institution about the incorrect address and the embarrassment they claimed had resulted from the word 'default' being visible to third parties, and received both a verbal and written apology. Dissatisfied with the handling of their complaint, the complainant wrote to the Privacy Commissioner. The Commissioner found that a failure by the banking institution to update the contact details was a breach of NPP 3.

  Regarding the word 'default', the Commissioner accepted the banking institution's assertion that its external mailing house had incorrectly folded the letter and that this would not recur.

• In W v Credit Provider [2006] PrivCmrA 22, a credit provider had listed a 'serious credit infringement' on the complainant's consumer credit information file in relation to a loan. In accordance with its then record retention policy for a serious credit infringement, the credit reporting agency removed the listing after five years. However, the complainant subsequently discovered that the credit provider had re-listed the infringement on the file.

  The complainant was dissatisfied with the response they had received from the credit provider after complaining about the matter and lodged a complaint with the Privacy Commissioner. The credit provider asserted that, at the time of the second listing, the previous listing did not appear on the complainant's file. However, evidence disproved this. The respondent also suggested that the second listing was for a different reason: the first had been for a failure by the complainant to comply with their credit obligations; the second was due to possible fraud.

  The Commissioner took the view that any subsequent refusal to fulfil credit obligations after the first listing formed part of the same infringement and that no evidence had been provided supporting the claim that the second listing was made due to the complainant having committed fraud. For these reasons, the Commissioner found that the credit provider had breached section 18E(1)(b)(x) of the Privacy Act, which allows credit providers to only make one serious credit infringement listing in relation to the same infringement.

  The credit provider advised the Commissioner that it had changed its procedures for listing infringements. The Commissioner was satisfied with these actions and, as the complainant did not substantiate their claim for compensation, the Commissioner closed the complaint.
  

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