Low doc loan declared unjust

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 notwithstanding the judge's description of the borrowers as "foolish", 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 borrower's expert described the loan's features:

"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


(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."

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Daylight saving starts 29 October
Tasmania started daylight saving on 1 October 2006. Australian Capital Territory, New South Wales, Victoria and South Australia start on 29 October. All end on 25 March, 2007.

Queensland, Western Australia and the Northern Territory do not have daylight saving.

Confused? Use ABC's Clock.

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Credit Code E-commerce amendments commence
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.

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Causes of Systemic Issues

A systemic issue for an organisation is an issue which has been raised in a dispute or several disputes which will affect a class of people in addition to those who have complained about it.

The September 2006 Bulletin from the Banking and Financial Services Ombudsman contains an extract of a recent presentation given by Diane Carmody, General Manager BFSO on how the BFSO deals with systemic issues in organisations (as opposed to industry-wide issues).

In the paper she said:

Between September 2001 and June 2006 BFSO has investigated and resolved 70 systemic issues. Some of the causes of the systemic issues are:

• Failure to disclose information about the operation of an account or facility
• Ambiguous and misleading disclosure
• Computer programming errors
• Human intervention
• Complex product packages
• Mergers and acquisitions
• Contract and calculation errors – fixed rate loans

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Who can purchase money be paid to?: insist on written disbursement authority from conveyancer

In Clarey v Permanent Trustee Co Limited & Anor [2005] VSCA 128 (19 May 2005), the vendor of a property successfully argued that until she was paid the balance of the purchase price, the purchaser was not entitled to register the transfer and the purchaser's lender was not entitled to register any mortgage from the purchaser.

In this case, the vendor did not receive the balance of the purchase price because her conveyancer misappropriated the funds after forging the transfer. The issue was whether the conveyancer had the vendor’s authority to receive the balance of the purchase price in the form of a cheque drawn payable to the conveyancer.

When the vendor found out that the funds were stolen she stopped registration of the transfer and the mortgage of the purchaser's lender (Permanent Trustee Co) which had provided the funds.

The Victorian Court of Appeal said:

"95...We accept that Permanent was not required (in the sense of being legally bound) to pay anything to the plaintiff. As his Honour said, Permanent’s legal obligations were to its client, the purchaser, and thus to disburse the loan funds as the purchaser directed. We also accept therefore that, if the plaintiff’s claim against Permanent were for breach of legal obligation to pay her the purchase price, the claim would be bound to fail. But the plaintiff’s claim against Permanent was not for compensation for breach of a legal obligation to pay her the purchase price. Her contention was that until she was paid the balance of the purchase price, by whom she did not care, the purchaser was not entitled to register the transfer and Permanent was not entitled to register any mortgage from the purchaser. And in point of principle that contention was correct.

96 A purchaser is not entitled to a transfer or thus to be registered as transferee until the purchase price is paid. So long as a vendor remains unpaid, he or she has every right to prevent a purchaser’s lender from being registered as mortgagee. A purchaser may satisfy the obligation to pay the purchase price by paying it either to the vendor or to a duly authorised agent of the vendor. But the purchaser cannot discharge the obligation to pay the purchase price by paying it to an agent who is not authorised to receive it or to an agent in a manner in which the agent is not authorised to receive it. In the result, payment to an agent who is not authorised to receive it or in a manner in which the agent is not authorised to receive it does not entitle the purchaser or his mortgagee to be registered. So, unless Chalhoub were shown to have had actual or ostensible authority to accept payment in the form of a cheque drawn payable to Middle East, or that the plaintiff was estopped from denying that he had such authority, she was entitled to resist registration. Permanent’s legal obligations to the plaintiff were in that sense beside the point.

97 We also think that his Honour was, with respect, wrong in fact. As the evidence stood, it was not open to conclude that Chalhoub had actual authority to receive the balance of the purchase price in the form of a cheque drawn payable to Middle East Finance. Apart from anything else, the fax of 5 September 2000 expressly limited Chalhoub’s authority to receiving the balance of the purchase price in the form of a bank cheque drawn payable to the plaintiff...

99...At common law a vendor’s solicitor did not have authority to receive payment on behalf of the vendor, and while the position was altered by statute the statute does not apply to "conveyancers" who are not solicitors. ... even if there were some basis in the evidence for concluding that "conveyancers" customarily hold funds on trust for their clients, there was nothing to indicate that it is in the usual and ordinary scope of authority of a "conveyancer" to receive the purchase price on behalf of a client in the form of a cheque drawn payable to the conveyancer."

To avoid the risk of possible arguments later, a purchaser or its lender should not accept a general authority to pay purchase money as directed by a conveyancer who is not a solicitor. There should be an itemised list of cheques for settlement signed by the vendor.

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