(14.07.2015) Unconscionable Conduct: Loan of $840K to Disability Pensioners

In Perpetual Trustees Victoria Ltd v Burns the Court was not at all convinced by the plaintiff lender’s submissions that it did not act unconscionably in loaning hundreds of thousands of dollars to a couple by way of 6 “low doc home loans”.

loanapprovalTellingly, the Court’s judgment begins:

Who would lend more than $840,000 to a couple, each of whom was on a disability pension with no prospects of any form of employment, with the husband partially blind and the wife with a long-term disability, when each had nothing to offer but the desire to speculate in real estate?

The full decision is available here: Perpetual Trustees Victoria Ltd v Burns [2015] WASC 234

Evidence of Defendants’ Comprehension & Disabilities

The evidence before the Court was that, amongst other things:

  1. The first defendant had a limited work history and suffered a number of physical disabilities. This included that she had a tendency to talk aloud to herself, found it difficult to relate to people, and would suffer from “fits of nervousness”. In addition, she was prone to be controlled by her husband, suffered a long history of poor eyesight, a frequent facial twitch, and feet & dental problems; and
  1. The second defendant attended a special school from a very young age, and suffered difficulty with reading and writing. He had a poor education and limited employment history. He had a distorted and grandiose view of his own abilities and competence and was prone to controlling the decisions of his wife, the first defendant.

Ultimately, the Court found that any person meeting or dealing with the defendants, particularly in any form of business or commercial transaction, ought to have immediately realised that each of them had significant handicaps and that there was a serious doubt whether or not they fully appreciated the nature of the transaction into which they were entering or its actual or potential consequences.

Intermediaries as Agents

The Court was also critical of intermediaries for the plaintiff lender in the manner in which approval for the various loans was considered and approved. In one case, the rationale and sole consideration for the intermediary was whether or not sufficient value existed in the asset being put up for security to justify a loan regardless of the defendants’ repayment abilities.

The intermediary thought that such a strategy was justified because the loans were low documentation or “easy doc loans” and there was a tacit assumption that such loans would only be applied for by experienced business people.

Ultimately, the facts and evidence indicated that the intermediaries were agents for the plaintiff such that their knowledge was imputed on the plaintiff so that it was, or was taken to be, aware of the defendants’ disabilities, the fragility of their financial position, and the fact that they were on pensions with no prospect of remunerative employment.

Outcome & Effect

The Court, amongst other things, dismissed the plaintiff’s claim to effect recovery action against the defendants; it also set aside a number of the loans, as well as mortgages which were put in place to secure same. It did so on the ground that the plaintiff had engaged in unconscionable conduct.

The decision is a reminder to banks and financial institutions that they must adopt lending practises which are, essentially, fair. The relationship between lenders and intermediaries should also be scrutinised and tightly controlled and, if an agency exists, appropriate lending practises must not only be implemented, but also strictly enforced.

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