If a lender refinances a property loan for a borrower in financial difficulty, is it responsible if the borrower keeps the mortgaged property (which then falls in value)? In one case a borrower said if the loan had not been approved he would have sold the property and released his equity for a higher amount.

These were the circumstances in ANZ Bank v Driffill [2016] NSWSC 1138. The Supreme Court of NSW rejected the claim for the lost sale surplus.

The borrower sought to set off damages of $550,000 for breaches by the lender of the responsible lending provisions of the National Credit Act against the debt of $795,000 owed to the Bank.

The borrower said the lender failed to investigate the borrower’s financial position before making the loan.

He argued that had the Bank not approved and advanced the home loan to him he would have sold the land in 2010 and, after discharging his previous mortgages, he would have been left with net proceeds of sale of about $550,000. But as a result of entering into the home loan contract with the ANZ Bank the borrower was eventually left with no net proceeds of sale after judgment for possession of the land in favour of the ANZ Bank, its sale and discharge of the mortgage over it.

The trial judge found Mr Driffill told the ANZ Bank, as part of his June 2010 application for the loan, that he had a net uncommitted monthly income of $12,267 from which he could service the loan. This was untrue. He had no income at that time and he was servicing the existing borrowings out of capital which was available to him. He gave evidence that he intended to, and did, service the ANZ refinancing loan from the same source. The funds advanced by ANZ Bank were applied to discharge the debts owing to the two prior mortgagees, leaving Mr Driffill in almost exactly the same position after the transaction as he had been in before it, except that the identity of the mortgagees had changed and the interest rate for his borrowing from the ANZ Bank was lower than the rates he had been paying the prior lenders.

Justice Fagan decided that the change of lender did not affect the borrower’s capacity to sell. The borrower admitted that he had no desire to exercise that capacity, either before or after the refinance. He held on to the property through the remainder of 2010 and during 2011, taking a second mortgage loan of $250,000 in September 2011. This further borrowing against the property was used in part to service the ANZ Bank debt. Consistently with Mr Driffill’s admissions that in September 2010 he did not wish to sell the property but was holding on to it in the expectation of appreciation in value and that selling was no more than an option, right through to late 2011 Mr Driffill was still showing determination to hold the title.

That determination to hold the property persisted until April 2012 when Mr Driffill realised he could no longer service the payments which were due to the ANZ Bank. He then commenced to market the property. He went into default on the ANZ loan in June 2012 and remained in default .

Justice Fagan concluded:

“Assuming he has an arguable case that ANZ Bank breached the Consumer Credit Law by failing to investigate adequately his capacity to service the new loan, Mr Driffill’s case that he suffered “loss and damage” and that it “resulted from the contravention” (in the words of s 178) entirely depends upon the allegation [had the plaintiff not approved and advanced the home loan to him he would have sold the land] that but it is unsupported and it would remain unsupported at trial because Mr Driffill has acknowledged that at the time of the refinance by ANZ in September 2010 he had no thought of selling the property, whatever the identity of the lender….

Quite apart from the factual concessions of Mr Driffill which contradict the critical assertion …, there is a difficulty of principle for Mr Driffill’s case. The making of ANZ’s loan to refinance existing debts cannot be shown to have caused, in a legal sense, the property not being sold in late 2010. After the advance from the ANZ Bank the question of sale or no sale remained a matter entirely for Mr Driffill to decide. The parameters affecting that decision were materially unchanged by the lending transaction.”