Feb 24, 2014 - and I attach a copy of the Recommendation to my Determination. I have adopted the terminology and definit
Determination Case number: 266293 Credit - Consumer Credit - Investment Property Loans - Financial Difficulty Default Notice 24 February 2014
Background 1.
This dispute concerns whether the Financial Services Provider’s (FSP’s) advance of an investment home loan to the Applicants comprised maladministration in lending.
Conclusions in Recommendation 2.
The case manager delivered a Recommendation dated 10 October 2013 on the issues in dispute. The Recommendation was in favour of the Applicants, and I attach a copy of the Recommendation to my Determination. I have adopted the terminology and definitions used in the Recommendation in my Determination.
3.
The case manager concluded in the Recommendation that:
4.
The FSP should have taken further steps to:
Clarify whether any of the Applicants’ numerous recent credit enquiries had proceeded; and
Establish the source of the Applicants’ contribution to the Property purchase price and costs.
Had it done so, it is more likely than not that the FSP would have become aware of information – and in particular, the extent of the Applicants’ liabilities to other credit providers, including to the Vendor of the Property under the Vendor Loan – would which have led it to decline the Loan application. In these circumstances, the FSP’s approval and advance of the Loan was maladministration in lending; 5.
The Applicants’ net loss arising from the maladministration in lending, after taking into consideration their expenses and benefits associated with purchasing and holding the investment Property, is $65,941.15. Since the Applicants are bankrupt, the FSP should pay this amount to their trustee in bankruptcy;
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6.
The Loan application form submitted by the Broker to the FSP contained incorrect information about their financial situation. In circumstances where the Applicants say they:
provided the Broker with correct information about their situation;
did not know the form contained incorrect information;
signed the form in a rush; and
trusted the Broker to pass on their correct information to the FSP,
it is not appropriate to apportion liability for the Applicants’ loss between them and the FSP; 7.
The Applicants should voluntarily surrender the Property to the FSP within 14 days of accepting the Recommendation and take all reasonable steps to ensure it can be sold by the FSP.
8.
The Applicants accepted the Recommendation but the FSP rejected it.
Further submissions 9.
After the Recommendation was rejected, the FSP made further submissions that can be summarised as follows:
Although: -
the Loan application did not disclose the Applicants’ debts to other credit providers;
-
its policy at the time did not require it to make further enquiry about the credit enquiries disclosed in the Applicants’ credit reports; and
-
it did not know of the existence of the Applicants’ debts to other credit providers when it approved the Loan,
it now acknowledges the Applicants had debts to other credit providers at the time. Given, however, the fact that the Applicants’ rent and utilities were paid by their employer, they would have been able to service the Loan as well as their debts to other credit providers on their wage and rental income. Accordingly, the advance of the Loan did not represent maladministration in lending;
The Applicants should have disclosed in the Loan application their debts to other credit providers and considered their own financial situation and how they believed they would be able to repay the Loan. In failing to do so, the Applicants contributed to their loss arising from the alleged maladministration and if there is a finding of maladministration against the FSP, liability for the loss should be apportioned between the Applicants and the FSP; and
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Since FOS’s approach to assessing compensation on a finding of maladministration in lending is to put the customer in the position they would have been had the credit not been granted, it is not appropriate to award the compensation for loss to the Applica nts’ trustee in bankruptcy, particularly where the Property has not been sold.
Ombudsman’s consideration 10.
I have decided this case on its merits, having regard to the relevant law, good industry practice, codes of practice and previous FOS decisions. I have taken into account all the material submitted by the parties, both before and after the Recommendation. I am satisfied that the documentation I have relied on has been provided to both parties.
11.
I have carefully considered the case manager’s Recommendation, together with the parties’ further submissions. I have also had regard to the opinions of FOS’s Banking Adviser, provided in response to the FSP’s rejection of the Recommendation and its recalculation of the Applicants’ serviceability for the Loan. The Banking Adviser has had extensive experience in the banking and financial services industry and regularly provides FOS with advice about banking and financial services practice and procedures, what constitutes good and standard banking practice, and reg ularly performs banking calculations – including serviceability assessments on loan applications.
12.
I am satisfied that the case manager’s Recommendation contains an accurate summary of the background to this dispute, the parties’ positions, the issues to be determined, and any applicable paragraphs of the Terms of Reference and any relevant law.
Maladministration in lending 13.
In its response to the Recommendation, the FSP provided a recalculation of serviceability for the Loan based on two adults and two dependents, including the additional liabilities referred to in paragraph 47 of the Recommendation, that is, two loan contracts with monthly repayments of $325 and $577, respectively, and a credit card with a monthly payment (having regard to its then balance) of $210. The FSP said that when one takes account of the Applicants’ “unique” circumstances in which their employer paid their rent and utilities bills, and reduces their living expenses accordingly, the Applicants’ servicing capacity for the Loan was acceptable “although approval by a higher delegation signatory would be required”.
14.
The FSP’s lending file includes a letter dated 14 August 2007 from the Applicants’ employer, confirming that as part of their employment package, it pays the Applicants’ rent and utilities. The Applicants have confirmed that they worked as caretakers in the apartment complex in which they lived – at unit 3 – and in which their investment unit – unit 12 – was located. In response to its recalculation of serviceability, the Applicants say the FSP has understated their true monthly commitment to their other creditors,
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particularly when one has regard to additional charges made for late (or no) payment. 15.
I accept that when one takes into account their employment package, the Applicants’ living expenses were reduced and, on the face of it, and subject to approval by a credit officer with a higher level authority, the servicing outcome for the Loan when provision is made for three of the Applicants’ debts to other credit providers may have fallen within the FSP’s “acceptable servicing range”. However, the FSP’s recalculation fails to take into account the Applicants’ liability for the Vendor Loan and in my view, the advance of the Loan continues to represent maladministration in lending.
16.
Under the terms of the $32,500 Vendor Loan Deed dated 28 September 2007, interest capitalised at 5.99% per annum, and the Applicants agreed to pay the Vendor $36,393.50 on its expiry on 28 September 2009. There is no information to show how the Applicants could have repaid the Vendor Loan as required by the Deed. Although the FSP says it did not know about the Vendor Loan, in my view, had it acted as a prudent banker, it would have found out about and accounted for the repayment of the Vendor Loan when undertaking its serviceability exercise for the Loan.
17.
In reaching this view, I have had regard to the opinion of the Banking Adviser and the following:
The Applicants were borrowing 95% for the Property purchase. Good lending practice requires a lender to satisfy itself that higher loan-tovalue borrowers have genuine savings that they contribute to the purchase;
In assessing whether borrowers have “genuine savings”, a prudent lender looks for evidence of savings in the borrowers’ names. A deposit paid under a purchase contract is not evidence of the borrowers’ savings nor that the deposit came from the borrowers’ own funds – the deposit may well come from another source, as in the Applicants’ case;
Had the FSP reviewed the Applicants’ circumstances and seen that they had no savings, it would, acting prudently, have enquired about the source of the deposit disclosed in the purchase contract for the Property. Such an enquiry would have disclosed not only that the deposit had not been paid prior to settlement, but the anticipated source of the deposit was the Vendor Loan; and
Financial services providers who lend for consumer property loans which involve vendor finance generally require that the borrower can pay out the vendor finance via instalment payments before the vendor finance terms finish. In the Applicants’ case, the Vendor Loan would have required a monthly payment of about $1,400 to $1,500 a month. Having regard to their income and expenses, the Applicants could not have afforded this.
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18.
In all of the circumstances, the approval and advance of the Loan represents maladministration in lending.
Apportionment and assessing financial loss on a finding of maladministration 19.
The FSP says that in finding the FSP “100% liable [FOS ] does not specify the compensation that has been awarded to the [Applicants] by COSL nor adjusted the compensation that has been awarded by COSL”.
20.
I have reviewed the Decision dated 9 April 2013 delivered by the Credit Ombudsman Service Limited in a dispute between the Applicants and the Broker (the Decision). In accordance with its procedures, FOS provided a copy of the Decision to the FSP in May 2013. The Decision concludes that the Applicants’ claim for compensation from the Broker has not been made out, and that it is unable to conclude that the Applicants suffered a loss as a result of the Broker’s conduct or if they have suffered a loss, that the Broker’s conduct caused the loss for which the Applicants seek compensation. In light of this, there is no basis to adjust the FSP’s compensation otherwise payable to the Applicants by reference to compensation previously paid by the Broker.
21.
The FSP also refers to FOS’s general approach to apportionment to support its submission that since the Applicants failed to disclose in the Loan application their three debts to other credit providers, and failed to consider and assess how they would make the Loan repayments, it should not be held 100% liable for their loss.
22.
Where FOS is satisfied that a financial services provider has engaged in maladministration in lending, but the borrower has by his or her conduct contributed to the loss arising from the maladministration, we may apportion liability for the loss between the financial services provider and the borrower to account for this. A borrower may, for example, fail to take reasonable care to protect his or her interests by signing blank loan application forms or by failing to read and review application forms completed on his behalf by another person in circumstances where the financial services provider relies on the contents of the form in assessing the borrower’s capacity to service and repay the loan.
23.
In considering the issue of whether there should be any apportionment of loss in the circumstances of this dispute, I must determine each party’s responsibility for the loss. In my view, and for the reasons I set out below, a 50/50 apportionment is appropriate: a.
A person who applies for a loan (in the absence of some vitiating conduct on the part of the FSP) should give consideration to their own financial situation and how they believe they will be able to repay the loan. It is not sufficient for a loan applicant to, in effect, turn a blind eye as to how they will repay the loan;
b.
A person who applies for a loan should take care to protect their own interests by ensuring the application is completed in full, and with correct information. It is reasonable to assume that the reason why a
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lender is requesting details about the loan applicant’s financial position is because it will rely on the information provided to make an assessment about their capacity to repay and whether it needs to make any further enquiries; and c.
The loan applicant will have a furthe r opportunity to protect their own interests when presented with the actual loan agreements and security documents. Again, absent some vitiating factor by the FSP, the loan applicant can decide not to sign the loan agreement and security documents.
24.
The Applicants have said consistently throughout the dispute that they told the Broker at the time of the Loan application they had four children (two of whom lived with them and two of whom received maintenance payments from Mr Applicant) and had $48,000 of debt to other credit providers. They say they trusted the Broker to refer to the FSP a Loan application containing their correct details. They say they “would never have signed anything knowing” that it contained incorrect information and say the Broker committed a fraud against them.
25.
The Applicants say when they attended the Broker’s office to sign the Loan application form, the staff was distracted and just told them where to sign. They say they did not have the chance to read the completed Loan application form.
26.
Although I accept the Applicants did not provide incorrect information to the Broker and did not intend to mislead the FSP about their financial position, I am nonetheless of the view that loan applicants who sign a loan application form containi ng false information and then sign a loan contract and mortgage ought reasonably to take some responsibility for their decision to apply for, and enter into, the loan contract. In all the circumstances of this dispute, I consider it is appropriate to apportion liability for the Applicants’ loss on a 50:50 basis. This means that the compensation to which the Applicants would otherwise be entitled ought to be discounted by 50%.
27.
I have reviewed the calculation of the Applicants’ net loss as set out in the Recommendation and am satisfied it is correct based on the available information. Despite being given the opportunity to do so, Mr Applicant has not provided a copy of his 2011 and 2013 tax returns and has said that Mrs Applicant would not have lodged tax returns for the period from 2011 to 2013 as she was not employed during this time. In these circumstances, it is appropriate to follow the case manager’s approach and apply “average” figures for the Applicants’ costs and benefits associated with owning the property for the 2011 and 2013 years. The Applicants say the Property was tenanted until 30 November 2013 and has been unoccupied since that date.
28.
Having discounted the Applicants’ net financial loss by half to take account of their contribution to their loss, the FSP is required to pay their trustee in bankruptcy $32,970.57.
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Non financial loss and maladministration 29.
30.
Under FOS’s Terms of Reference, I can consider claims for non-financial loss. Non-financial loss claims include claims for stress or inconvenience caused by a financial services provider’s error. The maximum amount that FOS can award for non-financial loss is $3,000 for each claim. FOS will only award compensation for non-financial loss where there has been an unusual degree or extent of stress or inconvenience. When assessing whether the circumstances are of an unusual nature, FOS considers:
the degree or extent of physical inconvenience suffered
the time taken to resolve the dispute, and
the extent to which the financial services provider’s actions interfered with an Applicant’s expectation of enjoyment or peace of mind.
In considering a claim for non-financial loss, FOS expects Applicants, generally, to: a.
be moderately robust in the way in which they deal with an unexpected problem; and
b.
take reasonable steps to minimise the inconvenience suffered.
31.
The Applicants say they suffered significant stress and upset as a result of the FSP’s maladministration. They say that after the advance of the Loan, they struggled financially, and were left with $100 each fortnight “to feed and clothe [their] family... it was way too hard to [be] able to support all the loans, mortgage and the family”. Mr Applicant has said that because of the FSP’s incorrect decision to advance the Loan, they have suffered stress and disappointment “which is waking [me] up in the middle of the night [and] has impacted me in a way that I would never wish for anyone... it wrecked my life in so many different ways...”. The Applicants no longer live in unit 3, in the complex in which their investment unit (number 12) is located, and have separated and are no longer living together. The Applicants were made bankrupt in or about mid 2013 upon the petition of the owners of the strata plan applying to the complex in which the investment unit is located. The strata plan owner had previously obtained judgment against the Applicants for unpaid strata levies of $11,000.
32.
I am satisfied that the Applicants have suffered and continue to suffer nonfinancial loss in the form of considerable stress, upset and inconvenience as a result of the FSP’s maladministration in lending and all that has flowed from it. I am satisfied that the issue of proceedings against the Applicants by the strata plan owner and its issuing of a creditor’s petition on the basis of which each Applicant was made bankrupt flowed from the FSP’s maladministration, and exacerbated the Applicants’ stress and upset.
33.
I require the FSP to compensate the Applicants for their non financial loss arising from its maladministration in lending by paying each of them $1,500. In deciding upon this figure, I took into consideration the Applicants’ contribution to the position in which they now find themselves; had they not
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so contributed, their compensation would have been greater, in so far as FOS’s Terms of Reference permit. How should the compensation be applied? 34.
The FSP says that it understands FOS’s approach to compensation where it finds maladministration i n lending is to put the borrower in the position they would have been in had the credit not been granted “and to generally award compensation to reduce the loan balance”. Given this, awarding compensation to their trustee in bankruptcy does not place the Applicants in the position they would have been had the credit not been provided. The FSP says this is particularly the case where, as here, the security Property has not been sold.
35.
I disagree with the FSP’s submission. The Recommendation set out FOS’s approach to assessing loss and awarding compensation where we are satisfied there has been maladministration in lending, and in particular, where, as here, the (maladministered) loan funds were used for investment purposes and the financial services provider took security over the investment property. Since the borrower would not have obtained the asset and the financial services provider would not have obtained the security over the asset, we require the secured asset to be sold.
36.
In assessing the Applicants’ net financial loss suffered by reason of the maladministration, I have calculated the Applicants’ outlays or expenses associated with the Property - which comprise their costs of purchase, holding costs, and repayments made to the FSP – and set off against this the benefit they obtained from the Property – which comprise rent and tax benefits. Although I accept that allowing the FSP to sell the Property and retain the proceeds and awarding compensation for the Applicants’ net loss as calculated above is an imperfect means to “wind back the clock” as if the poor lending had not occurred, it is nonetheless a reasonable approach in all the circumstances. Further, under our guidelines, if the property is sold at a shortfall, the FSP bears that shortfall, so it would follow, in the usual course, that compensation would be paid, rather than be applied off the loan balance.
37.
Because the Applicants are bankrupt, their assets (including the compensation for financial loss awarded by FOS) and liabilities are sequestered into the control of their trustee who is to divide the amount realised from the assets amongst the Applicants’ creditors. In any case of maladministration at the hands of a financial services provider, it is likely that borrowers will incur bad debts with other creditors who may ultimately be paid, in full or in part, if the borrower is later compensated appropriately for the maladministration. As noted previously, the petitioning creditor in the Applicants’ bankrupt estates was the owner of the strata plan in relation to the complex where their investment unit was located, and I am satisfied there is a clear link between the Applicants’ inability to pay their strata levies and their bankruptcy on one hand, and the FSP’s maladministration on the other. It is appropriate in all the circumstances that the pool of assets from which any distribution to the Applicants’ creditors is made includes an award
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of compensation for their net financial losses incurred as a result of their ownership of the asset purchased with the maladministered funds. 38.
The award of compensation for the Applicants’ non financial loss is akin to an award of compensation for a personal injury and is therefore not available for distribution amongst the Applicants’ creditors. I therefore require the FSP to pay this compensation directly to the Applicants. I will provide a copy of this Determination to the Applicants’ trustee.
Determination 39.
I determine in favour of the Applicants.
40.
Within 14 days of the Applicants accepting this Determination:
The Applicants should voluntarily surrender the Property to the FSP for it to sell. The Applicants should take all reasonable steps to ensure the property can be sold by the FSP;
The FSP should pay $32,970.57 to the Applicants’ trustee in bankruptcy; and
The FSP should pay $1,500 to each of the Applicants by paying that amount into an account each nominates.
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