The extent to which a lender may be liable for the conduct of an intermediary is open to doubt. The Supreme Court of Victoria found a lender liable for the conduct of a mortgage originator. The decision follows a Supreme Court of New South Wales decision in which the lender was found liable for the conduct of a finance broker (on the basis that it was the agent of the mortgage manager and the lender) and a Supreme Court of Western Australia decision in which a mortgage aggregator was found to have acted as the lender's agent and its knowledge was attributed to the lender. The result of all three decisions was that the loans and mortgages were set aside.

The Victorian case

The borrower signed "lo doc" loan application documents, which contained false information, without reading them. His only contact was with a conman who the court found must have had an association with the finance broker, Medallion, who submitted the loan application to the mortgage originator, Violet Home Loans Australia (VHLA).

The critical issue in the case was whether VHLA was the agent of the lender (Perpetual), notwithstanding the terms of the Mortgage Origination Agreement (MOA) which described VHLA as a mortgage manager and attempted to characterise VHLA as an independent contractor.

The court examined the dealings and contractual arrangements during the loan application process and the manner in which the loan was managed after settlement. The following factors meant the court found VHLA was Perpetual's agent:

  • the terms of the loan contract showed that Perpetual's relationship with the borrower was managed exclusively by VHLA (both before and after settlement)
  • by the terms of the MOA, Perpetual dictated the precise manner in which VHLA was to deal with borrowers and VHLA was required to comply with directions given by Perpetual (demonstrating control by Perpetual over VHLA, inconsistent with a principal and principal relationship).

The court found VHLA acted unconscionably in circumstances where:

  • VHLA knew that there were irregularities and "fudged" figures in the loan application and income declaration but made no further inquiry
  • VHLA knew that neither it nor Medallion had personally interviewed the borrower
  • VHLA knew that the borrower was in his mid sixties and the loan was to be secured by his only real asset, his home.

In processing the loan, VHLA was acting as Perpetual's agent and Perpetual was therefore liable for VHLA's unconscionable conduct.

Comment

The three Supreme Court decisions give scope to borrowers to successfully defend claims by lenders. These decisions should prompt lenders to review their documentation and dealings with intermediaries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.