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Q. When you say the differences were extreme you mean the differences between - -
A. The differences between the amount that the Cooks were lent under loan 5 and the amount that any of the bank calculators would allow them given their actual income. "
82 Nothing, which arose out of the cross-examination by Mr Rogers, in my view, undermined the thrust of Professor Keen's evidence.
83 I also permitted the tender of an expert report (Exhibit 10) by Mr Stuart Carraill, Senior Underwriter at Austral Mortgage Corporation Pty Ltd. After pointing out, inter alia, that while the Defendants had equity in the property to be mortgaged they had no savings of any note, Mr Carraill concluded his report of 9 January 2006:
"In my opinion, the borrowers would have had difficulty in refinancing to a Principal and Interest loan to bank & non-bank lenders based on the history detailed above. The only other available repayment option is on an interest only basis.
The lenders that I have detailed in paragraph 1 of Question 1 (Adelaide Bank Limited, Interestar, Macquarie Mortgages, AFIG, Commonwealth Bank, HSBC, St George and Homeside) would not have accepted this loan on an interest only basis.
The primary option then available to the borrowers would have been to explore alternative funders such as solicitor's funds or private investor.
These lenders loans are invariably short term in nature (1-3 years) require interest only repayments and attract a significantly higher interest rate. In most instances the loans feature excessive fees and charges in comparison to bank and non-bank lenders. Lenders of this type also require the loan to be unregulated under the UCCC (Uniform Consumer Credit Code)."
84 Mr Carraill also gave oral evidence and was cross-examined by Mr Rogers. He conceded that the financial circumstances of the Defendants could have changed for the better, leading them to be able to service the loan and refinance at the end of the term. He maintained, however, as I understand his evidence, that it would be unlikely that a major lender would provide a housing loan repayable over a lengthy term, by instalments of principal and interest.
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.
86 Obviously, the consequences of the Defendants' failure to comply with the terms of the mortgage put them in jeopardy of losing their home. Equally obviously, their bargaining power relative to the Plaintiff was weak, but they were, as the evidence of Mr Cook makes clear, extremely anxious to obtain the loan and to that end willing to make false statements of a material kind. Moreover, there was nothing particularly unjust, in my view, in the terms of the mortgage itself. No contrary submission was made. The lower interest rate of 8.8% pa seems to me not unreasonable although if, as I believe, there was little, or no prospect of the Defendants being able to service the interest at the lower rate of 8.8% pa, the same may not be able to be said about the higher rate of 13.8% pa, which would then be payable. I base my belief that the Defendants would be unlikely to be able to pay the interest even at 8.8% pa, upon their very dismal credit history, coupled with the financial information set forth in Mr Cook's affidavit of 19 September 2005, which was not challenged.
87 Although the introductory words of s70 (2) are restricted to "a term of a particular credit contract mortgage" etc. the subsequent provisions of the subsection seem to make it clear, consistently, in my view, with subsection (1) that a credit contract, mortgage etc. may be categorised as unjust within s70, even though there is nothing particularly unjust in its actual terms. The requirement to have regard to the public interest as well as many or most of the paragraphs within subsection (2) seem to make this plain.
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%.
89 No authority upon the Code was referred to me but I was referred to a number of authorities on the Contracts Review Act, which seem apposite. The most recent is that of the Court of Appeal in Perpetual Trustees Co Ltd v Khoshaba (2006) NSWCA 41. That case concerned a loan of $120,000 secured over the home of two pensioners. Neither the appellant nor anyone on its behalf was concerned in the purpose of the loan, which was, in fact, for the most part invested by the borrowers in a pyramid selling scheme involving shopping trolleys promoted by Karl Suleman Enterprises Pty Ltd. The scheme collapsed, leaving the borrowers without an expected flow of revenue and a debt to the lender. The trial judge had found the loan agreement between the lender and the borrowers and the mortgage given pursuant to that agreement to be unjust within s9 of the Contracts Review Act despite the lack of any involvement by the lender in the failed scheme.
90 In the course of his judgment Spigelman CJ made these observations:
"63 In many respects this case, in its basic structure, is similar to that considered by this Court in West v AGC (Advances) Ltd (1986) 5 NSWLR 610 where the Court held, by majority, that the contract was not "unjust". The Appellant in this case relies on a number of steps in the reasoning in West in support of its contention that the contract in the present case should not be found to be "unjust".
64 Of course each case must depend upon its own facts. Furthermore, West is now 20 years old. When the Parliament adopts so general, and inherently variable, a standard as that of 'justness', Parliament intends for courts to apply contemporary community standards about what is just. Such standards may vary over time, particularly over a period of two decades.
65 There have been observations in this Court that the standards may have changed from those applied in 1986 in West. (See Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; (2003) 11 BPR 20,841 at [79].)
66 The Appellant relied on the distinction drawn by McHugh JA in West at 621 between the contract and the overall transaction, relevantly the loan and the investment of the funds. On the basis of that distinction the Appellant submitted (T p22 cf T 31) that the investment agreement was not part of the "circumstances relating to the contract" within s7(1). In my opinion this submission should be rejected.
67 Nothing McHugh JA said in West suggests that the purpose for which a loan is obtained is not one of the relevant "circumstances". His Honour was drawing attention to the fact that the ultimate focal point of consideration under s7(1) must be the contract sought to be set aside or varied.
68 In my opinion, the purpose for which a loan is advanced is a relevant circumstance. This is confirmed by s9(2)(l) which includes, amongst the matters to which a court shall have regard in determining whether a contract is unjust: "The commercial or other setting, purpose and effect of the contract."
69 The purpose of a loan is a concern of a lender, because it is usually a material consideration in determining whether the particular lender is able to service and repay the loan. The Appellant's own Guidelines confirm the relevance of this matter, both in identifying the requirement that the purpose be specified and in the structure of the Guidelines themselves. In detail not necessary to be set out, the Guidelines specify quite distinct criteria, including different maximum amounts of loans, for different kinds of purposes to which the loans will be applied.
70 Accordingly, the purpose of the loan is a relevant circumstance relating to the contract within the meaning of s7 of the Act.
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76 Plainly, the conduct, whether by act or omission, of the party resisting a finding of unjustness under the Act is highly relevant, and will often be determinative. However, the scope of relevant circumstances is not confined to what the person resisting an order under s7(1) did or did not do and knew or ought to have known. The critical phrase in s7(1) - "the circumstances relating to the contract at the time it was made" - cannot be so limited. Section 9(1) provides that when determining unjustness "the court shall have regard to the public interest and to all the circumstances of the case". Furthermore, s9(2)(l) includes, as I have noted, amongst the relevant circumstances "the commercial or other setting, purpose and effect of the contract".
77 In the present case, the Appellant submitted, correctly in my opinion, that the fact that the Appellant had no involvement of any kind in the investment was entitled to significant weight in its favour.
78 The Appellant's submissions as to how this Court determine the issue of 'unjustness', against the background of uncontested factual findings, focused on the two particulars which Rolfe DCJ had emphasised: failure to comply with the Guidelines and failure to recommend independent advice. With respect to the first of these I set aside, for the reasons discussed above, any use of the Guidelines as an indication of prudent lending practice.
79 The Appellant submitted that the failure to observe its own Guidelines was not entitled to substantial, let alone determinative, weight. The Appellant accepted that the failure was a relevant consideration. However, it submitted that the Guidelines were designed for the purpose of protecting the lender, not the borrower. Their purpose was to enable the Appellant to assess and minimise its own risk.
80 This proposition can be accepted, but it does not lead to the conclusion, urged on the Court by the Appellant, that the failure is entitled to minimum weight when determining what is just in all the circumstances. The benefit to the borrower from a proper risk assessment may be indirect, because unintended, but that does not mean that it cannot, in appropriate circumstances, be entitled to significant weight in the determination of unjustness. It is clear from the list of factors contained in s9(2) and (3) of the Act, that a substantial purpose of the legislative scheme is to protect persons who are not able to look after themselves.
81 Rolfe DCJ's finding of fact, which is not challenged, that if the Guidelines had been observed the Appellant would never have advanced the loan to the Respondents was justified. The finding does not go only to causation. It is a factor entitled to be taken into account and given weight in the determination of unjustness.
82 I have set out above in the extract from his Honour's findings on the Guidelines issue each of the respects in which the Appellant failed to observe its own Guidelines. Of these failures the most significant, in my opinion, is the fact that the section of the standard form application about the purpose of the loan was left blank. This indicates that, as in Elkofairi supra at [79], 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. (I note that nothing like this occurred in West where the purpose of the loan was known.)
83 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.
84 This conclusion is reinforced by the Appellant's concomitant failure to verify or follow up, in the way identified by Rolfe DCJ, other details in the loan application. I do not suggest that the matter can be approached, as his Honour appeared to do, on the basis that the Appellant should be fixed with the knowledge it would or may have acquired if the Guidelines had been observed. However, the other failures, such as not verifying employment and income and not ensuring documents were properly executed, reinforce the conclusion that the Appellant was prepared to act on the basis of adequate security alone.
85 Where the security is the family home of a low income earner and a pensioner, this posture on the part of a lender is entitled to significant weight against the lender in the determination of unjustness."
91 Handley JA and Basten JA, in separate judgments, agreed with the Chief Justice The judgment of Basten JA contains the following paragraph of particular relevance to this case:
"128 To engage in pure asset lending, namely to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default, is to engage in a potentially fruitless enterprise, simply because there is no risk of loss. At least where the security is the sole residence of the borrower, there is a public interest in treating such contracts as unjust, at least in circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests, for the purposes of, for example, s 9(2)(e) or (f). That does not mean that the Act will permit intervention merely where the borrower has been foolish, gullible or greedy. Something more is required: see Esanda Finance Corp Ltd v Tong (1997) 41 NSWLR 482 at 491 (Handley JA) cited with approval in Elkofairi (supra) at [77] by Beazley JA."
92 Undoubtedly, the Defendants were foolish but, in my opinion, the circumstances of this case constitute the "something more" contemplated by Basten JA, 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.