Recommendation. 10 November 2014

Transcription

1 Recommendation 10 November 2014 Credit Mortgage broker Unconscionable conduct Loan manifestly inappropriate for consumers Reckless indifference to risk to consumers of default and loss of home Credit and Investments Ombudsman Limited ABN

2 10 November 2014 Consumers: Mr & Mrs S Queensland Financial Services Provider (the FSP): Australian finance broker Queensland Our Ref: 13/1986 RECOMMENDATION 1. This Recommendation letter sets 1 out COSL s investigation, findings and recommended resolution to this complaint. Findings 2. Based on the available information, we find that the FSP engaged in unconscionable conduct by arranging a loan for the consumers in circumstances where: (a) (b) the loan the FSP arranged was fundamentally inappropriate for the consumers circumstances; and when the FSP arranged the loan it was aware, or recklessly indifferent to the fact that, if the consumers could not obtain refinance, they would default under the loan and be required to sell their home to repay it. Recommendation 3. In order to compensate the consumers for the loss suffered as a result of the FSP s conduct, we recommend that the FSP pay the consumers the sum of $42, Background to complaint The loan 4. In or around late April or early May 2011, the consumers sought a loan to: (a) (b) refinance the mortgage over their property and residence located in Queensland (Church St property); pay overdue household bills; 2 1 Rule 22.1(d)(ii), COSL Rules 8 th Edition. All references to COSL Rules refers to our 8th Edition Rules. 2 Including approximately $5, owing for council rates.

3 (c) (d) purchase a car for Mr S to travel to and from work; and purchase chainsaws and equipment to carry out part-time work cutting firewood. The consumers personal circumstances 5. At that time: 3 (a) (b) (c) (d) (e) Mr S was casually employed as a bricklayer; Mrs S worked intermittently as a hairdresser and was receiving a Centrelink allowance; the consumers 18 year old daughter was living with them; the consumers only significant asset was the Church St property; and the consumers were separated, but living in the Church St property in separate residences and sharing expenses. 6. At that time, the consumers say that their financial circumstances were as follows: 3 (a) income: (i) Mr S approximately $3,000 (gross) per month; (ii) Mrs S approximately $833 (gross) per month; (b) expenses: (i) mortgage repayments approximately $525 per month; (ii) car loan repayments approximately $300 per month; (iii) other living expenses approximately $3,328 per month; (c) assets: (i) Church St property $260,000 (as per the valuation obtained from the evaluator on 15 September 2011); (ii) furniture $40,000; (iii) 2008 Suzuki $10,000; (iv) 1994 Holden $1,100; and 3 In accordance with the consumers income summary supplied by the consumers third party representative and asset and liability statement signed by the consumers in May 2011.

4 (d) liabilities: (i) GE loan $44,000; (ii) car loan $11,000; (iii) unpaid council rates $5, The consumers say that they are unsophisticated, and therefore have little financial knowledge to properly understand the concept of a bridging loan. Specifically: (a) Mr S: (i) left school in grade 8 when he was 13; (ii) has not obtained any formal qualifications after leaving school; (iii) has only been employed as a manual labourer; (iv) has never been involved in any form of business administration; and (v) has only had limited experience in financial transactions, including the prior GE loan and a car loan; and (b) Mrs S: (i) left school in grade 9 when she was 15; (ii) has only recently acquired her sole formal qualification by completing a mature age apprenticeship in hairdressing; (iii) has only been employed in manual jobs; (iv) has never been involved in any form of business administration; and (v) has only had limited experience in financial transactions, including the GE loan and a car loan. Consumers GE loan 8. The consumers had an existing home loan (the GE loan). The GE loan was secured by a registered mortgage over the Church St property. 9. In relation to the GE loan: (a) as at April 2011, the balance was approximately $44,000; (b) (c) (d) repayments were approximately $525 per month; the consumers had been making repayments for approximately 10 years; and its purpose was to refinance a previous loan which was secured by a registered mortgage over the Church St property, together with paying for

5 repairs to the same and to buy a car for Mr S. 10. As a result of an injury, between 2008 and 2010 Mr S did not work full-time. Consequently, the consumers experienced difficulties keeping up with the required repayments under the GE loan and it fell into arrears by $7, Given their difficulties, the consumers say that GE granted the consumers a payment variation on the grounds of financial hardship and did not take enforcement action against them to recover the arrears on the GE loan. Engagement with the FSP 12. In late April or early May 2011, Mr S contacted the FSP in response to the FSP s advertisement for mortgage broking services in a local paper. Mr S spoke with a representative of the FSP, Mr M, 4 and stated that he was looking to refinance the GE loan. 13. Over the course of a number of weeks, Mr S had a number of telephone discussions with the FSP in relation to obtaining finance. 14. At a meeting at Mr S s sister s house in early May 2011, Mr S informed the FSP that they wanted to borrow $80,000 for the purposes of: (a) refinancing the GE loan; (b) paying bills; (c) purchasing a car for Mr S to travel to and from work; and (d) to purchase chainsaws and equipment to carry out part time work cutting firewood. 15. At that meeting, the FSP asked Mr S if he wanted to start his own business. Mr S said he wanted to continue with his current job (as a bricklayer) but use the loan funds to purchase a car and chainsaws to take on extra work. 16. At that meeting, the FSP advised Mr S that he would be able to arrange the finance in the form of two loans. 17. The consumers say that they questioned the FSP what this meant, and the FSP advised that the consumers would borrow an initial amount for a short period (bridging loan) and then refinance that loan with another loan for a longer term (second loan). 18. When Mr S queried what the repayments would be under the two loans, the consumers state that the FSP said it would not know until the second loan was in place. 19. Mr S says he did not ask further questions at the time as he thought that this arrangement was common practice. 4 All of the consumers dealings with the FSP were with Mr M. At all material times Mr M was an employee and agent of the FSP.

6 Arranging the loans 20. The FSP then requested that the consumers provide certain information for the purpose of arranging the loans, including: (a) a valuation for the Church St property; (b) account statements for the GE loan; (c) a rates notice; and (d) a letter from Mr S s employer confirming his income. 21. Subsequent to that meeting, Mr S faxed the FSP copies of his payslips for the period May/June The respective payslips show that Mr S s net weekly income was as follows: 5 (a) payslip dated 11 May 2011 $0; (b) payslip dated 18 May 2011 $540; (c) payslip dated 25 May 2011 $573; (d) payslip dated 1 June 2011 $508; (e) payslip dated 8 June 2011 $810; (f) payslip dated 15 June 2011 $540. (An average net income of $495 per week / $2,145 per month 6 for that period.) 22. The consumers state that the FSP did not ask for any details of Mrs S s income. 23. After this time, Mr S had a number of telephone conversations with the FSP, and it was agreed that the consumers would apply for a bridging loan of $100,000. Mr S said if they borrowed that amount, Mrs S may be able to use the surplus loan funds of $20,000 to establish a mobile hairdressing business. 24. The consumers state that, in a meeting on or around 16 May 2011 between the FSP and the consumers, the FSP advised them that the bridging loan would be set up as a business loan. The consumers state that they did not query why the loan was to be established as a business loan. 25. In that meeting, the FSP produced a letter from a potential financial lender (the lender) dated 16 May 2011 with the subject heading RE: Proposed 5 In accordance with the payslips provided to the consumers third party representative. 6 Calculated as follows: Net income of $495 per week, multiplied by 52 to obtain an approximate annual net income of $25,740. Then dividing the approximate annual net income by 12 to obtain an approximate monthly net income of $2,145.

7 Loan to S. The letter requested the following information: (a) evidence of the amount owed on the GE loan; (b) two real estate appraisals; (c) advice from the consumers as to the purpose of the loan; and (d) a letter from the consumers accountant confirming the bridging loan was for a business purpose. 26. Next to (c) in the lender s letter, handwritten comments noted that the purpose of the bridging loan was to enable the consumers to start their own business. The consumers state that these comments were made by the FSP. 27. The consumers say that when they saw this note they informed the FSP that: (a) while Mr S wanted to buy chainsaws to earn additional money, this was not the focus of the loan; and (b) there were no firm plans in place for Mrs S to establish her hairdressing business. 28. With respect to obtaining an accountant s letter, the consumers say they told the FSP they did not have one. In reply, the FSP advised Mr S that the FSP had already seen an accountant on the consumers behalf. The consumers did not understand why they needed to get a letter from an accountant and did not question the FSP further. 29. Subsequent to that meeting, the consumers state that Mr S wrote a letter addressed to the lender setting out the consumers purpose for the finance, being: (a) to refinance the GE loan; (b) to repair the Church St property; (c) to buy a ute so that Mr S can go to work and to start his own business of cutting wood; and (d) to establish Mrs S s hairdressing business. 30. The consumers faxed the letter to the FSP, however the consumers do not have a copy of this letter. 31. The consumers state that the FSP also provided them with a GE loan disbursement authority form and advised the consumers on how to complete this form. The consumers faxed the completed form to the FSP. 7 7 Provided to COSL by the consumers third party representative.

8 32. The consumers state that they did not see the loan application associated with the bridging loan and a copy of the application has not been provided by the FSP. Establishment of the bridging loan with the lender 33. The consumers state that, in or about late June 2011, the FSP called them and asked them to attend a solicitor s office to complete the loan documents. 34. On 28 June 2011, the consumers attended the office of the consumers lawyers to sign documents in relation to the bridging loan. 35. A solicitor at the office, Ms G, showed the consumers documents which they had not seen before. The consumers state that Ms G did not read out the documents to the consumers, but some explanation was given. 36. The documents shown to the consumers were: (a) a letter from the lender s lawyers dated 27 June 2011; (b) a mortgage over the Church St property in favour of the lender; (c) a mortgage memorandum; (d) an authority to disburse moneys; (e) an authority and undertaking in favour of the lender; (f) a statement of particulars of proposed mortgage; (g) a trust account authority to be executed by the consumers; (h) solicitor s certificate; (i) a document titled Epitome of mortgage ; (j) the lender s lawyers memorandum of professional costs and outlays tax invoice; and (k) a statutory declaration that the loan was for a business purpose. 37. The consumers say they were instructed by Ms G to sign a number of the documents. The consumers were provided with some of the unsigned versions of the documents to keep. A solicitor from the consumers lawyers witnessed their signatures. 38. The consumers also signed a statutory declaration in which they declared that the bridging loan was for a business purpose. However, the consumers state that they were not advised by Ms G on the effect of this document. 39. The consumers state that they were confused about how the loan was being structured, and were under the impression that the interest would be $2,000 per month. When the consumers queried this, they claim that Ms G informed

9 them that the interest would be $5,000 per month and that the consumers should contact the FSP straightway to finalise the second loan. Ms G did not explain why the finance was to be structured this way. 40. The consumers say that they only signed the bridging loan and the associated documents because they were of the understanding that the FSP had organised a second loan to refinance the bridging loan. 41. The consumers state that they only became fully aware of the terms of the bridging loan after they signed the documents. 42. The key terms of the bridging loan were as follows: 8 (a) the consumers would be loaned the principal sum of $100,000 on 29 June 2011, due to be repaid in full on 29 August 2011 (two month term); (b) interest on the principal was to be paid monthly on the 29th day of each month at 10% per month ($10,000) (or 120% per annum) if paid on or within three days of the 29 th day; (c) interest on the principal to be paid monthly at 15% per month ($15,000) (or 180% per annum) if any repayment was received late; (d) interest of 15% per month would be charged on any amount outstanding until all amounts paid in full; and (e) the loan would be secured by a registered mortgage over the Church St property. 43. On 29 June 2011, the lender provided the bridging loan funds. The disbursement of the bridging loan funds was as follows: 9 (a) $3,500 to the FSP for its services in arranging the loan; (b) $2, to the lender s lawyers; (c) $1,100 to the consumers lawyers; (d) $45, to the consumers bank account; and (e) the balance ($46,795.46) to the GE loan. 44. Based on the FSP s advice about the need for two loans, the consumers thought that the bridging loan would be refinanced quickly. 45. The title certificate for the Church St property shows that on 1 July 2011, mortgage securing the GE loan was released and the lender s mortgage was 8 In accordance with an unexecuted copy of the mortgage over the Church St property registered with the Queensland Land Registry office in June In accordance with the authority to disburse moneys and Mr S bank account statement provided by the consumers third party representative.

10 registered. 46. The consumers have provided evidence showing that they used the loan funds to purchase: 10 (a) a car for $3,990 on 12 July 2011; and (b) a chainsaw for $1,280 on 14 July The consumer say that the balance of the loan funds was used to: (a) finish renovations to the Church St property; and (b) pay bills. Attempts to refinance the bridging loan 48. On 29 June 2011, the consumers called the FSP and said that they needed to refinance the bridging loan immediately, as they could not afford the repayments of $10,000 per month. 49. The consumers say that it was only at this time the FSP advised that to refinance they would need a property valuation showing that that the Church St property was worth $270, Shortly after, the Church St property was valued at $140,000 by a valuer arranged by the FSP. The consumers state that they paid the FSP a fee of $1,100 for this valuation (the first valuation). The consumers state that they never saw the valuation, but queried it given that the local council had valued the land alone at $177,500. Given the low valuation, the FSP informed the consumers that they would need a second valuation. 51. The consumers state that, in or around August 2011, the lender issued them a notice exercising power of sale and demanded the consumers give vacant possession of the Church St property. The lender also contacted the consumers and advised them that they were aware that the consumers were having trouble refinancing the loan. The consumers advised the lender that they would use the residual bridging loan funds to renovate the Church St property so that the property would be given a higher valuation. The lender told the consumers to do the best they could and that they would be given time to refinance. The consumers say that the lender did not say how long they would have to refinance. 52. The consumers state that in early September 2011 the FSP gave the consumers the name and number of a second valuer. The consumers subsequently engaged the second valuer to value the Church St property. On 15 September 2011, the consumers received a valuation of $260,000 for the 10 In accordance with the receipts provided by the consumers third party representative.

11 Church St property (the second valuation) The consumers state that, subsequent to receiving the second valuation, they spoke with the FSP and queried the progress of the second loan. The FSP advised the consumers that it was still trying to obtain the second loan, and would let them know when anything further occurred. 54. In early October 2011, the FSP contacted the consumers and advised that it was having trouble sourcing the second loan. 55. In late October 2011, the FSP informed the consumers that it was unable to secure a second loan to refinance the bridging loan, and that they would need to organise to refinance themselves. The consumers state that the FSP advised them that the proposed lender rejected the second valuation, as the proposed lender considered it to have been grossly inflated. 56. The consumers complaint to us included a letter dated 12 May 2011 from another lender (the second lender) to the consumers. This letter set out a loan offer from the second lender, with these key terms: (a) a loan amount of $110,000; (b) the loan amount to be repaid in 12 months from date of drawdown; (c) annual percentage rate of 11.95%; (d) interest only; (e) security over the consumers property; and (f) conditional on the property being valued at $270, The consumers state that they were unaware that an application for finance had been made to the second lender. The consumers claim that the FSP never advised the consumers of a possible loan from the second lender In or about late October or early November 2011, the consumers contacted the FSP and stated that they had called other mortgage brokers, but they were unsure how much they needed to borrow. The FSP advised the consumers that they would need $160,000 to pay out the bridging loan. 59. After that conversation, the consumers contacted the lender and queried the $160,000 payout. The lender confirmed that this was the approximate amount they needed to repay. 60. The consumers were unsuccessful in refinancing the bridging loan. Sale of the consumers property 11 A copy of that valuation has been provided by the consumers third party representative. 12 The consumers were given this letter by the lender in the course of the lender legal proceedings against the consumers.

12 61. On 28 November 2014, the lender filed an application in the District Court of Brisbane seeking possession of the Church St property. 62. On 23 December 2011, the consumers and the lender entered into a settlement agreement. 63. As a result of the lender s legal proceedings and the subsequent settlement agreement: (a) on 27 March 2012, the consumers sold the Church St property for $180,000; (b) the consumers paid the lender $135,000 from sale proceeds, and were then released from their liability under the bridging loan; and (c) the consumers had $30, left from the sale proceeds (after repaying the lender, paying associated sale costs and paying outstanding council rates of $7,835.06). Consumers claims 64. As we understand it, the consumers claims are as follows: (a) the FSP was aware that predominate purpose of the bridging loan was to refinance a mortgage over the consumers home, and was on notice that the loan was for a personal, domestic or household purpose (as a result, the loan was regulated by the National Credit Code (NCC) 13 and National Consumer Credit Protection Act 2009 (NCCP)); (b) as the bridging loan was regulated by the NCCP and the FSP provided a credit service, 14 the FSP breached the NCCP s requirement to conduct a preliminary assessment of whether the bridging loan was suitable; 15 (c) the consumers did not have the financial capacity to pay the very onerous interest rate of 10% per month (or 15% per month, if repayments were not made on time) for the term of the bridging loan with their income (the consumers could only repay the bridging loan by selling their property (their principal place of residence), or by refinancing with another lender), and therefore, the loan was unsuitable as the consumers could not meet their obligations under the loan; 16 (d) the interest charged under the bridging loan is unconscionable and breaches the NCC; (e) the FSP breached the Mortgage Finance Association of Australia (MFAA) Code of Practice (MFAA Code) given that: 13 Section 5 of the NCC. 14 Section 7 of the NCCP. 15 Sections of the NCCP. 16 Section 118 of the NCCP.

13 (i) the FSP failed to advise the consumers of the cost of the loan; 17 (ii) the consumers could not repay the bridging loan; 18 and (iii) the FSP failed to advise the consumers of the terms of the second loan; 19 and (f) the second loan was unsuitable because the term was for only 12 months and the consumers could again only repay that loan by selling the property, or by refinancing with another lender. Consumers preferred outcome 65. The consumers seek the following in compensation from the FSP: (a) all the interest and fees the consumers paid under the bridging loan; (b) the difference between the second valuation and the sale price obtained for the Church St property; (c) all costs the consumers incurred for the forced sale of the property; and (d) non-financial compensation for the stress and inconvenience of being forced to sell the property. FSP s response 66. The FSP has set out its response to the complaint in its letters dated 29 July 2013, 31 October 2013, and 12 March As we understand it, the FSP s position is as follows: (a) the consumers contacted the FSP and advised that they needed a loan as a matter of urgency, because they were in default under the GE loan and about to be evicted from their home; (b) the consumers advised the FSP that the loan would also be used to buy a car so that Mr S could earn money after his regular work hours, and also to buy a chainsaw and other equipment to increase the consumers income; (c) the FSP advised the consumers that a loan would take five to six weeks to process and the consumers said they could not wait that long, so the FSP offered to source a temporary bridging loan for a few weeks while a longer term facility could be arranged; (d) the funds provided under the bridging loan would be used for wholly commercial purposes, and the consumers signed a statutory declaration to this effect; (e) the consumers received independent legal advice about the terms of the bridging loan and they understood its terms; 17 Clause 15 and 18 of the MFAA Code. 18 Clauses 13, 14, 16 of the MFAA Code. 19 Clause 15 and 18 of the MFAA Code.

14 (f) the FSP advised the consumers that the second lender required a loan to value ratio of 50% for the second loan; (g) the consumers advised the FSP that they could supply a valuation showing the property was worth $270,000 and requested the FSP to source the bridging loan; (h) after the bridging loan was settled, the second lender requested a valuation showing the property was valued at $270,000; (i) the consumers arranged the valuation after the bridging loan was entered into; (j) the property was valued at far less than $260,000 and, as a result, the second loan was declined by the second lender; and (k) the second valuation, which the consumers had arranged, was false and misleading and, accordingly, the consumers are responsible for the loss they incurred. Requests for information 68. In response to our request for the FSP s file notes relating to the application for the bridging loan, the FSP advised in its dated 12 March 2014: 20 We do not keep any file notes. There is no need. An Application is submitted to the Lender, and is either declined or approved by the Lender. of the Statutory Declaration that the Complainant [the consumers] signed before his solicitor which clearly shows the commercial purpose of the Application. 69. In response to our request for details as to what enquiries the FSP made about the purpose of the bridging loan, the FSP advised in its dated 12 March 2014: H ow ever w e have We refer to the above note. We simply took their statement at face value and did not consider that the applicants would lie to us. can see, the Applicants clearly stated that they required the loan for the commercial purpose of the male's purchasing a vehicle and equipment for use in his pressure cleaning and bricklaying business, and the female's requirement for a vehicle and equipment for her hairdressing business. Refer attached Statutory Declaration marked "a". This clearly shows the applicants swearing as to the intended purpose. We note this was sworn before a Solicitor [ ]. A s you 70. In our dated 7 May 2014 to the FSP, we asked the FSP to provide specific responses to the following claims: (a) that the FSP knew or ought to have known that the bridging loan was for personal, domestic or household purposes given that over 50% of the loan funds (not including the loan costs) were used to refinance the GE loan; 20 All quotes have been copied verbatim unless otherwise stated.

15 (b) the bridging loan was an entirely inappropriate loan (in view of the consumer s goals and needs) and the FSP acted unconscionably in arranging it given its knowledge that Mr S s income was $3,000 (gross) per month and the bridging loan incurred monthly interest charge of either $10,000 or $15,000 per month; (c) the FSP should not have arranged the bridging loan until there was evidence that the consumers could satisfy the key conditions of the second loan (namely, a valuation of $270,000 for the mortgaged property); and (d) it was the FSP who referred the consumers to the valuer who appraised the market value of the property at $260, In that , we also asked the FSP to provide: (a) a copy of the bridging loan application; (b) documentation to show what steps the FSP had taken to arrange the second loan; (c) a copy of the valuation (required by the second lender) obtained by the FSP which showed the Church St property was valued at $140,000; and (d) documentation to show that the second lender rejected the consumers loan application. 72. We followed up this request in an on 27 May 2014 and a telephone call on 24 July 2014 to the FSP. However, the FSP has not provided the requested information. 73. Accordingly, where appropriate, we have inferred from the FSP s failure to provide the requested information that it does not have the information necessary to rebut the claims made against them, or that the information it has does not otherwise support its position. 21 COSL considerations 74. In dealing with a complaint, COSL observes procedural fairness and considers: (a) relevant legal requirements and rights provided by law to consumers; (b) applicable codes of practice; (c) good industry practice in the financial services industry; and (d) fairness in all the circumstances The parties to the complaint have been given the opportunity to provide information in support of their respective positions. All information provided by the parties has been exchanged between the parties and each party is aware of the issues raised in this complaint. 21 Rule 3.4, COSL Rules. 22 Rule 12.1, COSL Rules.

16 Applicable law 76. In reviewing this complaint and the matters raised by the consumers, we have had regard to whether the FSP has acted in a manner which would be considered to be unconscionable under the Australian Securities and Investments Commission Act 2001 (ASIC Act). 77. The ASIC Act prohibits a person, in trade or commerce, and in connection with the supply or acquisition of financial services, from engaging in unconscionable conduct. 78. At the relevant time, section 12CB of the ASIC Act relevantly stated as follows: 12CB Unconscionable conduct (1) A person must not, in trade or commerce, in connection with the supply or possible supply of financial services to a person, engage in conduct that is, in all the circumstances, unconscionable. (2) Without limiting the matters to which the Court may have regard for the purpose of determining whether a person (the supplier) has contravened subsection (1) in connection with the supply or possible supply of services to a person (the consumer), the Court may have regard to: (a) the relative strengths of the bargaining positions of the supplier and the consumer; and (b) whether, as a result of conduct engaged in by the supplier, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and (c) whether the consumer was able to understand any documents relating to the supply or possible supply of the services; and (d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the services; and (e) the amount for which, and the circumstances under which, the consumer could have acquired identical or equivalent services from a person other than the supplier.... (4) For the purpose of determining whether a person has contravened subsection (1) in connection with the supply or possible supply of financial services to another person: (a) the Court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and

17 (b) the Court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section. (5) A reference in this section to financial services is a reference to financial services of a kind ordinarily acquired for personal, domestic or household use. 79. Section 12CB of the ASIC Act covers a wide range of circumstances and the list of matters provided in that section, to which a court may have regard when considering whether conduct was unconscionable, is not exhaustive The meaning of the term unconscionable was considered by the Court in Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 2) 2009 FCA 17, 24 in which it was observed that: The ordinary or dictionary meaning of unconscionable, which involves notions of serious misconduct or something which is clearly unfair or unreasonable, is picked up by the use of the word in s 51AC. When used in that section, the expression requires that the actions of the alleged contravenor show no regard for conscience, and be irreconcilable with what is right or reasonable. Inevitably the expression imports a pejorative moral judgment. 25 [Emphasis added.] 81. In Director of Consumer Affairs v Peter Gerard Scully & Others, 26 the Supreme Court of Victoria affirmed that a plaintiff claiming unconscionable conduct under section 12CB must show that the conduct complained of demonstrated moral obloquy ; that is, it must be more than merely negligent and must involve some deliberate wrongdoing or moral fault, although there may be cases where recklessness will suffice A person who suffers loss or damage by conduct of another person in contravention of section 12CB may recover the amount of the loss or damage by action against that person Section 12CB of the ASIC Act applies where: (a) the FSP provided the consumer with financial services within the meaning of the ASIC Act; and (b) the financial services were of a kind ordinarily acquired for personal, domestic or household use. 84. A financial service is provided by a person when that person arranges for 23 Duckworth as Trustee for Ocean Farms Trust v H G & R Securities Pty Ltd [2007] FCA 1690 at [15]; Australian Securities and Investments Commission v Australian Lending Centre, at [198]. 24 The Court in that case considered the meaning of the term unconscionable in an action under section 52 of the former Trade Practices Act 1974 (Cth), which the provisions of the ASIC Act mirror. 25 Ibid, at 113(b) VSC Consumer Affairs Victoria v Scully & Ors (No 3) [2012] VSC 444 at [31-32] cited in Violet Home Loans Pty Ltd v Schmidt & Anor [2013] VSCA 56 at [58]. 28 ASIC Act, s 12GF.

18 another person to apply for or acquire a financial product. 29 A financial product is defined in the ASIC Act and includes a credit facility In this instance, the FSP assisted the consumers to apply for and acquire the bridging loan. As the bridging loan is a credit facility, it is considered to be a financial product under the ASIC Act. 86. It appears that the FSP is seeking to characterise its services as being commercial in nature, and relies on the statutory declaration the consumers signed on 28 June 2011, which provided that: (a) the bridging loan funds, secured over the Church St property, were to be applied wholly or predominantly (i.e. in excess of 50%) for business or investment purposes; (b) such business or investment purposes were specifically for: (i) a mobile hairdressing business; and (ii) pressure cleaning equipment; and (c) the declaration was true and made in accordance with the Oaths Act of For reasons set out below, we consider that the FSP knew this declaration was not true. Also, our view is that the mortgage broking service provided by the FSP was a financial service of a kind ordinarily acquired for personal, domestic or household uses. In forming this view, we have followed the approach of the courts when they have dealt with claims under section 12CB. 31 Did the FSP engage in unconscionable conduct? 88. Having considered the available information and documentation, we find that by arranging the bridging loan for the consumers, the FSP engaged in unconscionable conduct within the meaning of section 12CB of the ASIC Act. 89. Our reasons for this are summarised as follows: (a) the bridging loan was fundamentally inappropriate for the consumers circumstances; and (b) when the FSP arranged the bridging loan, it was aware that, or recklessly indifferent to the fact that, if the consumers could not obtain refinance, they would default under the loan and be required to sell their home to repay it. The bridging loan was fundamentally inappropriate for the consumers 29 ASIC Act, s 12BAB (7) and (8). 30 ASIC Act, s 12BAA and the Australian Securities and Investments Commission Regulations 2001, r 2B(1). 31 See Violet Home Loans Pty Ltd v Schmidt [2013] VSCA 56; Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; see also the mirror provision under the former Trade Practices Act 1974 (Cth), which was considered in Bunnings Group Pty Ltd v Laminex Group Ltd (2006) FCR 479.

19 90. We consider that the bridging loan was fundamentally inappropriate for the consumers circumstances because: (a) the consumers had informed the FSP that they required a loan to: (i) refinance their GE loan; (ii) finish renovations on the Church St property; (iii) pay bills; (iv) buy a ute and chainsaw so that Mr S can travel to and form work, and start his own business of cutting wood; and (v) establish Mrs S s hairdressing business, and (b) bridging loans are generally not intended for people in the consumers position. 91. Bridging loans are typically intended for short-term transactions, typically in the context of borrowers who are seeking finance to purchase a new property before they have sold their existing property. 92. We consider that a mortgage broker in the FSP s position, exercising due care and skill, ought to have understood that the consumers were looking for a loan with a long term and a suitable interest rate, not a loan with a short term and a high interest rate; 91. While we note that the consumers did obtain independent legal advice, this advice appears to relate to the terms of the bridging loan, and would not have turned towards the appropriateness of the bridging loan as a financial product for the consumers. In addition, the solicitor who gave the advice, Ms G, would not have been in a position to have known that the FSP would fail to act with due care and skill in arranging the second loan to refinance the bridging loan. Accordingly, the solicitor was only able to advise the consumers to contact the FSP without delay to finalise the second loan. 92. The consumers state that they only signed the bridging loan and the associated documents because they understood that the FSP had organised a second loan to refinance the bridging loan. 93. The FSP claims that the bridging loan was not inappropriate for the consumers, as they needed a loan as a matter of urgency (as they were faced with being evicted by their then-current lender). Given that a standard loan would take five to six weeks to process, the FSP held the view that the bridging loan was a product that would meet the consumers needs. 94. However, the consumers have denied that they told the FSP that they were facing eviction from their property and say that they would not have done this given they had entered into a payment arrangement on financial hardship grounds under the GE loan. 95. The supposed urgency of the consumers need for the bridging loan is also questionable, given that the consumers first approached the FSP in or around late April or early May The second lender issued their conditional loan

20 offer to the consumers on 12 May 2011, however the bridging loan did not settle until 29 June 2011, and the FSP has failed to provide any information to indicate that they took steps to finalise the loan from the second lender between 12 May 2011 and the settlement of the bridging loan. 96. We consider that there was no urgency to refinance the consumers GE loan and, in view of the fact that the second lender had provided a conditional loan offer on 12 May 2011, there appears to be no identifiable need of the consumers which the bridging loan met. The FSP was aware, or recklessly indifferent, to the fact that the consumers could only repay the bridging loan either by refinancing or by selling their home 97. When arranging a loan, a mortgage broker usually obtains financial information about the loan applicant. It is also good industry practice (as well as being a legal requirement) for a mortgage broker to keep books and records about their dealings with consumers. 98. Despite a number of requests, the FSP has failed to provide a copy of the loan application it prepared for the consumers. The consumers also do not have a copy in their possession. We have drawn the following inferences regarding the FSP s knowledge about the consumers financial circumstances and their capacity to meet the repayments under the bridging loan: (a) the FSP knew that the consumers only substantial asset was the Church St property; and (b) the FSP knew that Mr S s monthly net income was approximately $1,980 (as per the pay slips provided to the FSP) and the FSP did not seek to verify Mrs S s income or the consumers expenses. 99. Even if the FSP did not have actual knowledge of the consumers financial circumstances, the courts have held that a loan may be unconscionable in circumstances where a broker was content to arrange a loan based solely on the value of the proposed security property and had no regard for, or was recklessly indifferent to, the borrower s capacity to repay the loan The terms of the bridging loan provided that the monthly interest repayments would be either $10,000 or $15, As the FSP had arranged the bridging loan, the FSP would have been aware of this Given the consumers low income, it was clear the consumers lacked the capacity to pay the required monthly repayments of $10,000 and would incur the higher interest charge of $15,000 per month for the bridging loan Consequently, it is our view that the FSP knew that: 32 Australian Securities and Investments Commission v Australian Lending Centre Pty Ltd No 3 [2012] FCA In accordance with the loan terms to the bridging loan, the interest due would be $10,000 per month (at an interest rate of 10% per month) if this amount was paid on the 29th of each month or within three days of this date, otherwise the interest due would be $15,000 (at an interest rate of 15% per month).

21 (a) it would be impossible for the consumers to meet the monthly repayments under the bridging loan; and (b) if the consumers could not obtain refinance, they would need to sell their home. The FSP s position on the bridging loan 103. We note the FSP s position that: (a) the consumers advised the FSP that the bridging loan would be used for wholly commercial purposes and the consumers signed a statutory declaration to this effect; (b) the consumers received legal advice with respect to the terms and conditions of the bridging loan; and (c) the consumers supplied a false and misleading valuation and are therefore responsible for the second lender s rejection of their loan application for the second loan Having considered the information and documentation provided by the parties, it is our view that: (a) the statutory declaration was merely a procedural requirement to satisfy the lender s lending criteria and that the FSP was aware, or ought to be aware, that the predominate purpose of the bridging loan was for personal, domestic or household use and does not otherwise provide a defense; (b) while the consumers say they attended the consumers lawyers office to sign the bridging loan and were given a brief overview of the same, they claim that their decision to proceed with the bridging loan transaction was based on the advice and recommendation given by the FSP as to the structure and merits of the bridging loan transaction, rather than the legal advice provided by the consumers lawyers about the loan documentation; (c) the consumers state that the FSP advised them that the bridging loan was short term (two months) and that it would be refinanced with the FSP s assistance, however, they were not aware that the FSP had obtained a conditional offer with respect to the second loan and, among other things, it was conditional upon the consumers property being valued at $270,000, and while the consumers obtained legal advice in relation to the terms and conditions of the bridging loan, the FSP failed to fully appraise them of the risks associated with the transaction if refinance could not be obtained; 34 (d) the consumers advise that it was the FSP who recommended the consumers obtain the valuation, and we also note the FSP has failed to particularise why the valuation is misleading or the valuation it obtained showing the property was worth $140,000; and (e) in any event, we consider that the FSP s unconscionable conduct had 34 We also note that, as per the decision in Fast Fix Loans v Samardzic [2011] NSWCA 260, it does not necessarily follow that an explanation of loan documentation by a solicitor that a borrower is fully conversant of the risks associated with a loan.

22 Conclusion already taken place prior to this issue being raised It is our view that the FSP provided financial services in the circumstances where it knew, or ought reasonably to have known, that the consequences of its actions would expose the consumers to a real and significant risk the loss of their home, which was their major financial asset This leads us to conclude that in providing its financial services, the FSP engaged in conduct that showed no regard for conscience, or which was irreconcilable with what is right or reasonable. 35 As such, we find that the FSP engaged in unconscionable conduct under section 12CB of the ASIC Act In light of this finding, it is not necessary to express a view as to whether the FSP: (a) has acted unconscionable in breach of 12CA of the ASIC Act; (b) has acted in a manner that is in breach of the NCCP; nor (c) has acted in a manner that is in breach of the MFAA Code. Are the consumers entitled to compensation? 108. COSL can award compensation that: (a) is fair; (b) is appropriate to the circumstances; (c) compensates the consumers (but not other persons) for the loss the consumers (but not other persons) have suffered; and (d) is not an unexpected "windfall" for the consumers When compensating for loss suffered as a result of unconscionable conduct, the law seeks to do no more than the minimum necessary to achieve practical justice Had the FSP not acted in a manner that was unconscionable, we consider that it would not have arranged, and the consumers would not have entered into, the bridging loan. Accordingly, we consider that a fair resolution to this complaint would be for the FSP to compensate the consumers the losses they suffered as a result of entering into the bridging loan. These are: (a) all interest, fees and charges paid to the lender in connection with the loan (we note the amount to pay out the bridging loan was $135,000); 35 Consumer Commission v Allphones Retail Pty Ltd (No 2) at 113(b). 36 Guideline 53.3, COSL Guidelines 4 th Edition. 37 Elkofairi v Permanent Trustee Co Ltd (2002) NSWCA 413 at [98] cited in Perpetual Trustees Australia Limited v Schmidt & Anor [2010] VSC 67 at [234].

23 (b) the $1,100 valuation fee paid by the consumers for the first valuation; and (c) the costs incurred by the consumer as a result of the sale of the property ($1,841.90) The consumers submit that they suffered a capital loss by having to sell their property hastily as a result of the legal settlement with the lender. The consumers say that they are entitled to the difference between the valuation contained in second valuation, $260,000, and the amount that the Church St property was sold for, $180, We note that: (a) the second valuation: (i) is disputed by the FSP as being grossly inflated; and (ii) was done seven months before the Church St property was sold; (b) the legal settlement, entered into on 23 December 2011 required the consumers to either refinance the Church St property or give vacant possession by April 2012; (c) the consumers engaged a real estate agent in March 2012; (d) the real estate agent the consumers engaged advised the consumers that, given the short time they had to sell the Church St property, they should advertise it for $200,000; (e) there was only one buyer interested in the Church St property, who offered $180,000 in late March 2012; and (f) the consumers accepted the offer (by private treaty), which they say was at arm s length, as it was made six days before the deadline set in the legal settlement In light of the above, we cannot find that the consumers are entitled to their claimed capital loss given that: (a) the validity of the second valuation is in dispute; (b) property valuations are valid for a period of up to three months, and as the second valuation was obtained seven months before the sale of the Church St property, it cannot be relied upon; 39 and (c) the consumers delayed in engaging a real estate agent (the settlement agreement was entered into on 23 December 2011 and the real estate agent was only engaged in March 2012). It is our view that this delay inhibited the consumers from putting the Church St property to auction or to ascertain if 38 Figure taken from the settlement statement for the Church St property. 39 The NSW Court of Appeal in Ta Ho Ma Pty Ltd v Allen [1999] NSWCA 202 determined that it was reasonable for a trial judge to accept expert evidence that it is unreasonable, as a general rule, to accept valuations older than three months.

24 there were buyers willing to pay more than $180, When assessing loss, fairness requires that any benefit the consumers received as a result of entering into the loan also be accounted for. We consider these benefits to include: (a) the benefit the consumer received in refinancing their existing GE loan, including interest they otherwise would have incurred if they had the GE loan in place until the sale of the property; and (b) loan funds they spent for their own use Accordingly, we have calculated the benefit the consumers received as a result of entering into the bridging loan to be as follows: (a) amount used to refinance the GE loan: $46,795.22; 40 (b) amount of interest the consumers would have incurred on the GE loan had they retained that loan (instead of refinancing it with the bridging loan) from when it was refinanced to the lender, to when the lender s loan was discharged, calculated as follows: Interest rate on GE loan x GE loan balance x Number of months the consumers had the lender s loan 14.45% x $46, x 10 months = ; and $5, (c) the amounts that the consumers used for other personal benefits, $45, In view of the above, we consider that the total benefit the consumers received as a result of entering into the bridging loan is as follows: Total benefit = $46, $45, $5, = $98, Consequently, we assess the consumers loss to be as follows: Amount paid to the lender to discharge the loan: $135,000 ADD Valuation fee: $1,100 ADD Costs incurred by consumer as a result of sale of property: 1, LESS Benefit consumer received: $98, TOTAL LOSS = $39, Compensation sought for stress and inconvenience 118. The consumers have also claimed that they have suffered stress and 40 In accordance with the loan authority to disburse moneys and Mr S s bank account statements.