Jul 062011

I received case notes today, as we sometimes do when there’s an outcome of interest to lenders and mortgage managers, from Bransgroves Lawyers.

This case, denoted “RHG Mortgage Corporation v Baira [2011] NSWSC 520” makes interesting reading especially in light of the advent of the National Consumer Credit Protection Act 2009 which came into force in April 2010. Have a read of the Baira case and you’ll soon find that it’s Ye Olde standard case of ‘Ma il vostro onore, IO non capisco L’inglese’ [but Your Honour, I no understand English]. This is still a relatively common cop out by ethnic borrowers and guarantors when push comes to shove in a case of financial default. It is precisely why all lenders today require any situation even remotely associated with third-party security, guarantees and co-borrowers giving mortgages in support of borrowings which may not directly be of benefit to them, to be explained to all parties by a non-aligned solicitor. The mortgage documentation, guarantees, implications of same and likely detrimental outcomes in the case of default are required to be explained to borrowers and guarantors in exquisite detail, and recorded as having been so, in order that situations like the Baira attempt don’t arise.

Now, the case itself is of interest to me in light of the fact that all credit providers are now required to be licensed in Australia, which includes finance brokers. This is known as an Australian Financial Services licence. The Baira case must have occurred originally long before the advent of credit licensing for finance brokers and similar such providers, especially in light of the Judge’s comments in regard to the broker:

Nothing will be served by chronicling the various misrepresentations the borrowers claimed the broker made. I find he made no such misrepresentations. I accept his evidence that his function as a broker was to find a potentially willing lender and to assemble and forward the documentation required by that lender. He was not, as between himself and the would-be borrower, an investigator of the truth of the information conveyed to him by that would-be borrower.

It was not the task of the broker to investigate his clients. The broker acted in accordance with what he had been told. It was not his task to challenge the truth of the information.

I find this determination absolutely fascinating in light of the NCCP which supersedes previous provisions of acting as a finance broker of lender’s representative. Under Chapter 3 of that Act – Responsible Lending Conduct – Licensees that provide credit assistance in relation to credit contracts are required to, among other provisions:

Division 4 requires a licensee, before providing credit assistance to a consumer in relation to a credit contract, to make a preliminary assessment as to whether the contract will be unsuitable for the consumer. To do this, the licensee must make inquiries and verifications about the consumer’s requirements, objectives and financial situation. The licensee must give the consumer a copy of the assessment if requested.

In the Baira case, had the circumstances occurred under the auspices of the NCCP, which by the way is yet to be tested in law, I doubt the Judge would have been as supportive of the finance broker, copious files notes or not. You see, the NCCP throws all responsibility for forensic investigation of the applicant’s financial position, capacity to repay, character, etc back onto the person who does the interviewing. The person who physically takes the application and acts as the credit provider or the provider’s representative. This is why consumer lending is such a nightmare in today’s market, and why only major banks will undertake consumer lending and then only to those people with squeaky clean credit records. If you’ve forgotten to pay a phone bill at any stage & Telstra slaps a default notice on your credit file, get ready for a fun ride next time you want to borrow.

In my business, we shun consumer lending purely & simply due to the penalties contained within the NCCP, and the untested vagaries of the legislation. The Baira case, had it occurred under the NCCP, would probably have a similar outcome, but the reaching of that outcome would not be so cut and dried as the case notes portray it sans-NCCP. It’s this one piece of legislation which is contributing to the retraction of home building, borrowing for purchases and investment and even business financing where owner-occupied residential mortgage security is used as collateral. Until the NCCP is tested in court, there is no surety of position for licensed lenders. No surety means lending simply isn’t worth the risk. The legislation needs to be tested in law, but no-one wants to be the first. Clearly, the legislation requires amendment and definition.

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