In Karamihos v Bendigo and Adelaide Bank Limited [2013] NSWSC 172 the NSW Supreme Court ordered that a loan refinance contract was unjust under the National Credit Code. Judge Pembroke ordered that the contract be set aside and that the borrowers should be put in the same position that they would have been in if they had not taken on increased borrowings, with credit for the payments already made by them.

UPDATE: Appeal allowed

Bendigo had refinanced, through brokers, a BOQ loan for $966,000 with a new loan for $1.2 million over 25 years secured over their home.

The borrowers were in their 70s. English was their second language. Even though the Bank’s own policy required additional measures for borrowers over 60, the credit assessment was based on an “exit strategy” which relied on the borrower’s own value estimate of a commercial property and that it would be sufficient to discharge all debts they owed; it was not. The commercial property did not secure the loan.

One of the documents the borrowers signed was headed ‘Representations by Mortgagors’. It contained a representation and warranty by Mr and Mrs Karamihos that they ‘had been advised to take independent legal advice before signing the mortgage and [that] we have had an opportunity to do so’. In fact, Mr and Mrs Karamihos received no independent legal or financial advice and were not told by anyone that they should do so. They signed the loan documents and the related papers at home in the presence of their daughter who received $100,000 from the loan.

Judge Pembroke’s analysis is a useful recap of the law and its application to the facts.

“In May 2007, Mr and Mrs Karamihos were already elderly. Mr Karamihos was 72 years old and his wife was 73 years…..

I am quite satisfied that the ability of Mr and Mrs Karamihos to read and understand written English was feeble. Their ability to do so in relation to detailed documents relating to the respective legal obligations of borrowers, lenders and intermediaries was virtually non-existent. Nonetheless, Mr Karamihos understood in a rudimentary way the essential elements of a loan and mortgage transaction. As did Mrs Karamihos. Both well understood the need to maintain their monthly repayments and the consequences of default. They had obtained numerous loans over the years – probably far too many – but they were unsophisticated (albeit frequent) borrowers with limited financial acumen, who operated at a relatively simple, homespun level…..

The trouble with old age is that it magnifies the risks associated with borrowing. The larger the loan and the older the borrowers, the greater the risk. The revenue stream on which the maintenance of the loan depends is inevitably more likely to be disrupted by ill health or retirement. The statistical probability of the occurrence of unforeseen events that may affect the viability of the loan necessarily increases. All of this came home to roost for Mr and Mrs Karamihos and for BAB….

The findings of fact that I have made lead inexorably to the conclusion that the contract of loan and mortgage entered into between Mr and Mrs Karamihos and BAB in May 2007 was unjust for the purpose of section 76(1) of the NCC. I have reached that conclusion having regard to the consequence of non compliance by Mr and Mrs Karamihos, namely the loss of their sole residence; the relative bargaining power of the parties; the absence of any negotiation at the time the transaction was entered into, and absence of any practical opportunity for there to be any negotiation. I have also had regard to the fact that Mr and Mrs Karamihos were not reasonably able to protect their interests. They were too elderly and too foolish to know what was in their best interests. And they had no independent legal or financial advice. ….

I am satisfied that Mr and Mrs Karamihos were not able to read and fully comprehend the typed written documents that they were required to sign. Nor did they, in my view, have any apprehension of the risks they faced in the event of unexpected illness, retirement and diminution of earnings. ….

BAB knew that Mr and Mrs Karamihos did not have independent legal and financial advice. And it did not take any active steps to ensure that they understood the nature and implications of the transaction. ….

Most importantly, BAB did not make reasonable enquiry as to whether Mr and Mrs Karamihos could meet their obligations under the loan. …. Its unsuitability was compounded by the bank’s incompetence. …

In this case, there was no fraud by the borrower, just misplaced enthusiasm and an absence of reality. There was no evidentiary foundation for a finding that Mr Karamihos intended to deceive BAB. The bank simply did not make reasonable enquiry; when it knew that enquiry was called for; when it knew that the value of the (commercial property) was an essential element … of its approval.”