The serviceability of the loan
64The defendant relied on a number of matters for the proposition that the plaintiff was indifferent to her capacity to service the loan, including the plaintiff's age and the lack of substantiation of her income.
65I reject the defendant's submission that the age of the defendant was a circumstance that made the contract unjust. At the time of the Third Loan, the defendant was 62 and was still earning. I reject the submission that, because it could not reasonably be expected that she would still be receiving remuneration from her own labour when the 25-year term of the loan expired, the Third Transaction was unjust. Such a submission, if accepted, would deprive all but the young and those in early middle age of the opportunity of raising finance by mortgages of 25 or 30 years' duration which are intended to be serviced by monies derived from their labour.
66The defendant submitted that the evidence established that her income was insufficient to service the mortgage and that it was unjust for the plaintiff to advance her funds without inquiring as to her income and requiring substantiation thereof. One of the difficulties with this submission is that it rests on the following propositions that have not been established:
(1)that the group certificates in the defendant's possession that were produced in answer to a notice to produce represented the sum total of the defendant's earnings;
(2)that the estimates of tax prepared by the defendant's accountant record accurately all of her income;
(3)that the Notices of Assessment issued by the Australian Taxation Office (ATO) record all of the defendant's taxable income, as distinct from the income that she chose to declare;
(4)that the defendant had no other resources from which to meet mortgage payments; and
(5)that the defendant's declaration that she was able to meet the loan repayments represented no more than her subjective belief and was inherently unreliable.
67The defendant submitted that the Notices of Assessment and estimates of tax payable were business records and therefore reliable and that there was no need for her to give evidence to verify them. She submitted that these documents together with the pay slips and group certificates were the only evidence of income and that therefore I should accept them as proving the matters set out above. She submitted that it would be quite wrong to infer that she had not declared all of her income to the ATO since this would amount to a criminal offence and therefore the Briginshaw standard would apply: Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 361-362, per Dixon J.
68I reject these submissions. I am not persuaded that the documents referred to above represent, at the dates they bear, the sum total of the defendant's income derived either from her labour, or from her labour and investments, at those times. It follows from this finding that I do not accept the defendant's submissions to the effect that she was relevantly unable to service either the First or the Second Loans. Although I can infer from the default, and the fact of these proceedings, that the defendant was unable to service the Third Loan, the reason for her inability to do so is not established by the evidence.
69One of the difficulties with the defendant's submission as to the quantum of her income and her capacity to repay the mortgage is that it depends on her having told the truth to the ATO and not having told the truth to the plaintiff in the declaration that she was able to meet the loan repayments. The argument advanced by the defendant that her declaration to the plaintiff that she was able to service the Third Loan was no more than an expression of her subjective belief, the non-fulfilment of which did not adversely reflect upon the credibility of other statements made by her and recorded in business records, needs only to be stated to be rejected.
70The defendant sought to establish the proposition that, by reason of its involvement in the Second Loan, the plaintiff knew or ought to have known of the defendant's inability to service the First, Second and Third Loans.
71The defendant relied on evidence that she was in default in repaying the First Loan at the time she applied for the Second Loan. Bank statements tendered showed that from May 2003 until August 2003 there were defaults in payment of interest with respect to the First Transaction. These documents were not provided to Challenger when it was assessing the defendant's application for the Second Loan. The defendant provided Challenger with documents entitled "Statement Summaries" from AWL which covered the period 17 December 2002 to 30 April 2003 which showed the loan account to be in order. It appears from this evidence that the defendant withheld evidence of her default from Challenger when she applied for the Second Loan and that Challenger did not insist on complete documentary evidence of itemised transactions which, if provided, would have established default.
72I do not accept the defendant's submission that the Second Loan should not, on the basis of the defaults, have gone ahead. Although there are passages in the transcript of the cross-examination of Mr Wort and Ms Tran which could be understood as implying that it was of crucial importance that there be no absolutely no default when refinancing, I gained the impression, when seeing and hearing them give evidence, that they were effectively brow-beaten by the defendant's senior counsel into making such concessions and that those concessions did not correspond either with their true beliefs or their usual practices. The same observation applies to their evidence about the defendant's declaration about the documents provided to Fox which is referred to below.
73In any event, the defaults in 2003 do not, in my view, bear on the justice or otherwise of the Third Transaction because of the time that had elapsed between the defaults in 2003 and the time at which the Third Transaction was entered into. In particular, I do not consider that it establishes that the plaintiff was indifferent to serviceability at the time of the Third Transaction.
74The application for the Second Loan, which was signed and dated by the defendant on 1 August 2003, contains a declaration by the defendant as follows:
"I/We supplied all Pay Slips, Group Certificates, Tax Returns or Tax Returns [sic] or Tax Assessment notices, Confirmation of Employment, Bank Statements or any other evidence of savings history in original form to Fox Home Loans Pty Limited."
75The defendant sought to use this declaration to establish that the plaintiff had access to all of the defendant's documents in each of the categories referred to as at the date of the declaration. She then developed this proposition by submitting that, in that event, the plaintiff would have known that the defendant could not afford to service the Second Loan without hardship.
76I do not accept this argument. The wording of the declaration is so general that one could not infer that each and every document in each and every category had been supplied. Furthermore the words "or any other evidence of savings history" suggests that there were alternative ways of fulfilling the requirements administered by Fox. There is no evidence of what exactly the defendant supplied to Fox in support of her application for the Second Loan. She did not give evidence herself. She told Fox, as she later told Mr Carr, that she was self-employed. According to her application for the Second Loan she had been a self-employed investor since 1996. Accordingly, on the basis of this representation, it is unlikely that she would have provided pay slips or group certificates or confirmation of employment, since the existence of such documents would have been inconsistent with her stated occupation of self-employed investor.
77The defendant relied on the lack of documents on the file with respect to the Second Transaction that corresponded to the categories in the declaration referred to above as being an instance of the plaintiff's (through its originators) failure to comply with its guidelines. In this respect, and in others, the defendants relied on what Allsop P (with whom Bathurst CJ and Campbell JA agreed) said in Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 (Tonto) at [265]:
"In all the circumstances, these considerations are relevant to conclude that the unjustness of the contracts can be seen as unjustness affecting Tonto HL and the lenders. This conclusion is relevant to the assessment of unjustness and the extent to which the lenders should be viewed as bearing responsibility for what happened and in applying the broad considerations contained in the CRA , founded as they are in justice and fairness. Looking at these events as brought about primarily by the fraud of Streetwise, a fair assessment is that the business structure put in place by the lenders in how it operated was significantly responsible for the preying upon these people by Streetwise. That is not to ignore the basis upon which the trial and appeal proceeded, that 'Lo Doc Lending' per se was not unjust. Nor is it to introduce an enterprise concept of agency; rather it is to recognise that a sub-contracted lending structure of the kind here, in which persons such as Streetwise are 'chased' to become the introductory agents, should have guidelines enforced with real vigour to deal with the obvious objective risks of fraud and deception. No one criticised these guidelines. Their operation was loose, and affected by the attitude found by his Honour. It is only fair and just to recognise the significant responsibility of the lenders in these circumstances."
78In Tonto, the relevant guidelines were intended to deal with the risk of fraud, which ensued. In the instant case, there is no allegation of fraud. The guidelines alleged not to have been complied with rested, in my view, on an erroneous construction of the borrower's declaration as to documents made in respect of the Second Transaction set out above.
79The defendant made much of Mr Carr's certification in respect of the Third Loan that:
"there is no evidence or indication to suggest that the loan or any part of it is being provided for the benefit of a third party."
80The defendant sought to impugn Mr Carr's competence and credibility by eliciting an admission from him that the $70,000 component of the loan was for the benefit of the defendant's daughter and that the certification was, accordingly, false. Mr Carr explained in re-examination why he had given the certification:
"What I understood at the time was that, because Mrs Knezevic was driving the process with the potential purchase of a property with her daughter, that it was to her benefit, because she was so actively involved, if you like, and initiated the process."
81I accept this explanation. The evidence referred to in the narrative above shows that the defendant's daughter had not entered into a contract to purchase a property at the time the Third Loan settled. The advance of $70,000 was, in substance, to benefit the defendant at the time it was made because she wanted to give her daughter the money to help her. Parents are permitted to help their children and it is to their 'benefit' to do so. The facts of the instant case are very far from other cases in this area where parents are called upon by debt-ridden and cash-strapped children to bail them out of poor investment decisions. In any event, as referred to above, there is no challenge to the $70,000 part of the advance, which was given to the defendant's daughter.
82The defendant also submitted that the plaintiff's indifference to the defendant's capacity to repay the Third Loan was evidenced by the circumstance that it failed to ask whether she had used the $50,000 component of the Second Loan which was not required to refinance the First Loan, to repay the Second Loan. I do not consider that there was any reasonable basis to expect, much less require, the plaintiff to make that enquiry. Nor was there any evidence that that was what in fact occurred.
83There is nothing per se unjust about the absence of verification of the borrower's means of repayment of a loan. As White J said in Michalopoulos v Perpetual Trustees Victoria Ltd [2010] NSWSC 1450 (Michalopoulos) at [106]-[107]
"The fact that no inquiry was made to verify the borrowers' income and Interstar's Guidelines Manual did not require any such attempted verification does not lead to the conclusion that the lender advanced the loan being indifferent to the borrowers' capacity to repay. The absence of verification and any requirement to seek verification shows that the lender was relying heavily on its security. But it is not unjust, let alone unconscionable, that a lender should rely on its security, as protection against the consequences of false information.
The fact that declarations were required of the borrowers' income shows that the lender was not indifferent to the borrowers' ability to service the loan. The fact that a different conclusion was reached on the facts in Perpetual Trustee Co Limited v Khoshaba ([2006] NSWCA 41) is neither here nor there."
84Further, as White J said in Michalopoulos at [105], if a lender does not know that the borrower's declarations are false it would be wrong to conclude that the loan was advanced without regard to the borrower's capacity to service it. The defendant has neither persuaded me that her declarations as to capacity to pay were false (except in hindsight, as evidenced by the fact of these proceedings), nor that the plaintiff knew or ought to have known them to be so.
85In any event I am satisfied that the plaintiff did enquire as to whether the defendant was able to pay the Third Loan and was assured by her that she could. The plaintiff was not indifferent to the defendant's capacity to service the loan. It obtained a credit report and insisted that the single default be remedied before the loan was approved. It obtained loan statements from the previous loan, the Second Loan, which indicated that it was in order. The plaintiff had a credible, explicable and prudent reason for refinancing: she wanted a lower interest rate, and to raise further funds. Her past financial experience, as established by the number of times she had used the equity in the Property to raise funds, meant that there was no reason for the plaintiff to doubt that her declaration was honestly made, and in fact true.
86It follows that, whatever the relevance of the term 'asset lending', it does not apply to the plaintiff's conduct with respect to the Third Transaction since it is a term, as Allsop P explained in Fast Fix Loans Pty Ltd v Samardzic [2011] NSWCA 260 at [43], that is used:
"...to describe a form of lending where the lender has little, if any, regard for the capacity of the borrower to repay and rests satisfied with the security to protect itself."
87I find that the defendant understood that, if indeed her declaration that she was able to service the loan was false because her income was not sufficient to permit her to do so, she was conveying the wrong impression to the plaintiff: Perpetual Trustees Victoria Limited v Longobardi [2009] NSWSC 654; cf. Tonto.
88Far from indicating any financial distress, the defendant's application for refinance was supported by cogent financial reasons: her desire to raise further funds and to reduce the interest cost. The monthly repayments were not substantial for someone who was still working and the interest rate was more beneficial than the rate that applied to the Second Transaction. The time frame within which the transaction was sought, approved and completed is consistent with its being a considered commercial transaction by a party cognizant both of the lender's procedures and her own rights. Her facility with English, her apparent ability to understand documents and respond appropriately to questions and explanations tells against any vulnerability which might have cast a burden on Mr Carr to make further enquiries.
89The defendant has not established any matter relating either to her circumstances or to the terms of the loan that indicates that she was unable to act at all times in her own commercial interests. It is not to the point that the loan to be refinanced was occasioned by a poor investment choice she made in 2002, which she chose to refinance in 2003, and again in 2005, on each occasion using the refinancing opportunity to obtain larger advances and, in the case of the Third Loan, a better interest rate. In each instance, she obtained a benefit: discharge from an earlier liability and a greater sum.
90Even had the pleadings entitled the defendant to put the proposition that she received no benefit from the earlier transactions and that therefore they could be taken into account in connection with the justice or otherwise of the Third Transactions, it would have not availed her. Her situation is at the opposite end of the spectrum from that of the borrowers in St George Bank Limited v Trimarchi [2004] NSWCA 120. On each occasion, she knew what she was doing and she voluntarily undertook a commercial risk, the extent of which she was in a good position to assess. I reject the submission that she obtained no benefit from the earlier transactions. That the "benefit" of being afforded the opportunity to invest in the High Noon/ Foresyte investment turned out to be of dubious value is not to the point. The First Loan was for an investment purpose. The subsequent loans derive their purpose from the first, since they were, relevantly refinancing the first loan: Jonsson v Arkway Pty Ltd [2003] NSWSC 815; 58 NSWLR 451 at 456-457, per Shaw J.
91In the course of the hearing the defendant sought to characterise the Third Loan as "high risk lending" on the grounds of her age and lack of verification of her income. I do not accept this epithet (cf. Kowalczuk v Accom Finance Pty Limited [2008] NSWCA 343; 77 NSWLR 205 at 228, per Campbell JA). The interest rate that the plaintiff charged the defendant for the loan does not indicate that the plaintiff adjudged the loan to be high risk. To the extent that the label was accepted by Mr Wort, it was my impression that he did so as a result of the tenor of the cross-examination, rather than because it represented his actual view.
92Because the defendant has not discharged her onus of persuading me that the Third Transaction was unjust, it is not necessary for me to consider the second step of whether any relief ought be granted: Kowalczuk, at [87].
93I have approached the question of whether the Third Transaction was unjust as if Mr Carr and the plaintiff were one and the same, since it does not, in my view, produce a different result if one takes account of the consideration that Carr Financial Services was the mortgage originator and not the lender. However, even if one attributed all of Mr Carr's knowledge to the plaintiff, it would not, in my view, make the contract unjust. In deference to the submissions made by the defendant that Mr Carr was the plaintiff's "agent to know", I propose to set out my findings on the question of agency.