30/11/2009

A recent decision of the New South Wales Supreme Court has held that the mortgage broker who arranged loans for borrowers was an agent of the lender and in the circumstances of these cases the mortgages were unjust and the loan agreement and mortgage void in whole.

 

Historically, courts apply a principal and agent relationship to mortgage brokers, such that the mortgage broker is the agent for the borrower unless the particular circumstances dictate otherwise.

 

The essential elements of a principal and agent relationship are:

 

1.             consent of both the principal and agent; and

2.             authority given to the agent by the principal to act on the principal’s behalf.

 

In the recent decision of three cases heard together, Permanent Trustee Company Limited v O’Donnell; Permanent Trustee Company Limited v Di Benedetto; Tonto Home Loans Australia Pty ltd v Tavares [2009] NSWSC 902, the Supreme Court held that the broker was the agent of the lender and in the circumstances these cases the contracts were unjust within the meaning of the Contracts Review Act 1980 (NSW) and declared void.

 

The Court found that the broker fraudulently completed the loan application form and Income Declaration form in Low Doc Loans without the borrower’s knowledge.  The broker knew the true financial position of each borrower and knew that truthful disclosure of the borrower’s assets and income would not meet the lending guidelines of the lender.  The Court held that but for the fraud, the loan would not have been approved.

 

The lending guidelines in these cases gave the loan manager a degree of control over the actions of the broker and the loan application forms were branded by the broker to act on behalf of the loan manager.  The broker did not offer any alternative lenders or ascertain any alternative loan sources.  In these circumstances the role of the broker was not that of an independent finance broker acting on behalf of a borrower but a loan introducer.

 

The Court therefore held that, for the:

 

“reasons of justice and commonsense, to my mind, require that the knowledge of [broker] of the true financial position of the [borrowers] to be imputed to the [lender]”

 

therefore the knowledge of the broker that the borrowers could not afford the loan was knowledge that was impliedly known by the lender.

 

The conclusion is that the Court declared the mortgages void against the borrowers pursuant to s 7(1)(b) of the Contracts Review Act 1980 (NSW).  That section provides that:

 

“(1)       Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following:

(a)        …

(b)        it may make an order declaring the contract void, in whole or in part”

 

If you have any Mortgage questions or wish to seek specific advice, please contact David Nicoll at Townsends Business & Corporate Lawyers (02) 8296 6222