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BFCSA: Unregulated Loans according to Gadens and Denovan 2006. Bad Bankers simply reclassified loans!

Posted by on in ROYAL COMMISSION URGENT
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Unregulated loans riskier than UCCC loans?
by Jon Denovan

October 2006

http://www.nsw.gadens.com.au/clientaccess/newsletters/Updates%202006/update_banking_finance_251006.htm#banking

Many lenders go to significant trouble to ensure the loans they make are not regulated by the UCCC.  But does this make the loan safer?  I've generally come to the conclusion that unregulated loans secured over the borrower's principal place of residence are often riskier than regulated loans.

The starting point in reaching this conclusion is that all loan contracts are subject to review on the basis that they are unconscionable.  That's true for both regulated and unregulated loans.  Once a court or tribunal varies or annuls a loan contract because it's unconscionable, the mortgage securing that credit contract and any guarantee are similarly affected.

Many credit officers focus on s 70(1)(l) of the UCCC – the so-called "Exocet missile".  The section got this nick name because it was initially considered a very dangerous concept for lenders.  It stated that one (and importantly only one) of the matters a court can take into consideration in determining whether a contract is unconscionable, is whether the lender knew or could have found out by reasonable enquiry of the borrower, that the borrower could not make the repayments or could not make them without substantial hardship.

However, there is ample court authority that the ability to repay is also taken into account in determining whether an unregulated loan is unjust.  There are several decisions making it clear that lenders who make loans to unsophisticated individual borrowers relying solely on the security are likely to encounter problems.

Against that background, it's easy to see that the greatest hardship is likely to be inflicted on borrowers who stand to lose their principal place of residence if the mortgage is enforced.  If the money has been lent to assist purchasing the property or for living expenses, so long as the lender did not act recklessly, it is more likely than not that the court will not interfere with the commercial bargain. However, if the money has been lent for business purposes, particularly business purposes that were risky, or where the borrower was likely to have been influenced by advisors or relations, then it is quite likely the court will act to protect the borrower's home.

 

At the end of the day, courts and tribunals are trying to ensure that there are fair business dealings and that borrowers are not "ripped off".  The chance of being ripped off is much higher where the principal place of residence is put at risk for speculative purposes and the lender did not make proper enquiries as to the ability of the borrower to repay and failed to enquire whether the borrower was acting sensibly.  Accordingly, lenders who go to some trouble to classify loans secured by the principal place of residence is unregulated, are probably putting themselves in harm's way rather than improving their position.

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