Australia: Financial services provider guilty of unconscionable conduct, "turning a blind eye" to inconsistencies

In Violet Home Loans Pty Ltd v Schmidt & Anor,¹ the Victorian Court of Appeal found that where a mortgage introducer has provided fraudulent details on a loan application, a mortgage originator may be guilty of unconscionable conduct where it was aware of irregularities in a loan application but made no effort to investigate them.

Facts

In 2004 Manfred Schmidt, a pensioner, obtained a line of credit facility for $190,000 from Perpetual Trustees Australia Limited (Perpetual), and provided a mortgage over his home as security for the facility.

Violet Home Loans Australia Pty Limited (Violet) was the mortgage originator and manager, and processed the loan application on behalf of Perpetual. The purpose of the loan was to invest in what Mr Schmidt thought was a property development in Carrum. He was deceived into doing so by Ian Maddocks, who was eventually convicted of fraud.

Mr Maddocks arranged a "Low Doc" loan for Mr Schmidt from Perpetual and prepared the loan application and income declaration. The documents contained false information regarding Mr Schmidt's employment and his annual income. Mr Schmidt did not provide the false information, but signed the documents without reading them.

A Violet credit officer reviewed the application and noted several discrepancies, including different annual incomes being provided ($65,000 and $75,000 in different parts of the application), and requested an ABN on the basis that Mr Schmidt's self-employed income was over $50,000. The application form was subsequently amended and resubmitted showing an income of $49,000, and accordingly no ABN was provided. Again, Mr Schmidt signed the application form without reading it.

Most of the money advanced was paid directly or indirectly to Mr Maddocks and was lost. The debt to Perpetual eventually exceeded $450,000.

The question before the Court was, who should bear the loss - Mr Schmidt, or Violet Home Loans Pty Limited (VHL), that company having effectively indemnified Perpetual for any loss sustained by reason of Violet's conduct.

Supreme Court proceedings

At first instances, the trial judge found that Violet had acted unconscionably. The Court ordered that Mr Schmidt pay Perpetual approximately $85,000, being the amount that Mr Schmidt owed on an existing mortgage that was discharged using the Perpetual loan. An order was also made that VHL indemnify Perpetual.

The trial judge formed the view that Mr Schmidt was vulnerable in the sense that he was unsophisticated, naïve and lacked financial knowledge. The Court found that Violet did not act in good faith and could have, being aware of the inconsistencies in the two loan applications, made further enquiries of Mr Schmidt's capacity to repay the debt.

Appeal

The Court of Appeal upheld the decision of the trial judge, noting the following:

1. Mr Schmidt was not knowingly responsible for the inclusion of false information.
2. The absence of the Violet credit officer as a witness was not properly explained, and this was unsatisfactory.
3. The mortgage manager was advised of three different figures for Mr Schmidt's annual income, but did not request any further details or confirmation. The mortgage manager could have made enquiries into Mr Schmidt's true capacity to repay the debt but did not, and by "turning a blind eye" to the discrepancies in the application form it acted unconscionably within the meaning of s12CB of the Australian Securities and Investments Commission Act 2001 (Cth).
4. Violet was aware that Mr Schmidt's property was his only substantial asset. However, the Court noted that whether or not the lending was asset-based or not, the fact that the mortgage manager made no effort to investigate the discrepancies in the application was unacceptable. In fact, the judgment indicated that a finding of asset-based lending on its own may not be sufficient to determine conduct as "unconscionable":
5. ... we do not find it of assistance to consider whether conduct is unconscionable simply because of the type of lending that is involved, for example, asset based lending. Rather, the task requires a more synthesised approach which takes into account all of the facts relevant to the impugned conduct and determines whether, in all the circumstances, that particular conduct is unconscionable.²

5. Although not necessary to decide, the Court determined that s51AC of the Trade Practices Act 1974 (Cth) did not apply. The Court declined to make a determination in relation to whether or not the conduct was unconscionable at general law.

Conclusion

This decision sends a warning to financial service providers to ensure its officers make reasonable enquiries with respect to any apparent inconsistencies in information provided in support of a loan application.

Footnotes

¹[2013] VSCA 56.
²Ibid [59].

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