There are an increasing number of legal actions relating to enforcement of loans where the conduct of intermediaries (eg brokers, loan originators and managers), who have been interposed between the lender and borrower, is relevant.

In Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 (heard together with FirstMac Ltd v Di Benedetto; FirstMac Ltd v O’Donnell) the Supreme Court of New South Wales Court of Appeal held that although a broker (Streetwise Loans) was not the agent of Tonto Home Loans Australia Pty Ltd in one case and Permanent Trustee Company Ltd, in two other cases, the circumstances in each case lead to the conclusion the loan contracts were unjust under the Contracts Review Act 1980 (NSW). Tavares and Di Benedetto were relieved of all liability under their loans and the O’Donnells were given 75% relief.

UPDATE 22 June 2012: Special leave application to appeal to High Court by Tonto and FirstMac refused with costs

No finding was made of unconscionability.

ASIC intervened in the trial and was a respondent in each appeal.

The 3 cases related to investments in Streetwise Properties by borrowers introduced by Streetwise Loans who were introducers for Tonto Home Loans. Judge Allsop described the matter as one “where a lender uses contracted so-called “mortgage originators” which in turn use their own networks of so-called “sub-introducers” to find and bring forward potential borrowers and one of those sub-introducers engages in deceptive, indeed dishonest, conduct that leads to the borrowers borrowing funds from the lender and providing mortgage securities in return. In each case, the borrowers, after a body of conduct directed towards them involving a mixture of falsehoods and pressure and their own imprudence, entered the borrowing arrangements and provided the funds obtained to a company associated with the sub-introducer, which funds were ultimately lost.”

Streetwise’s director was subsequently found guilty of fraud.

Structure of the lenders
The loans were funded through two wholesale lending programmes: the “Origin Program” ( funded by ANZ in respect of which Permanent was the lender to the borrowers but Tonto HL had delegated authority to assess each loan application and to make a credit decision on lending) and the “FirstMac Program” (in respect of which Tonto HLA was the lender to the borrowers).

The Tavares loan was placed under the FirstMac Program with Tonto HLA as lender. The O’Donnell loan was initially placed under the FirstMac Program, but transferred to the Origin Program, after funding reached a relevant limit on the FirstMac Program. The Di Benedetto loan was placed under the Origin Program.

Judge Allsop made the following general comments:

“First, for the prudent operation of the programmes, introducers of loan applications, such as S Loans should be reputable. Fraud can be seen as an obvious systemic risk. Depending on the precise function undertaken by such introducers, the lending process was necessarily, to a degree, reliant on the introducer being honest and businesslike in the choice of customer, the extraction of relevant information from the customer and the choice of loan product suitable to the customer.

Secondly, whilst enquiries as to probity and competence could be carried out about introducers, the drawing up and the administration of proper lending guidelines was the essential systemic check to avoid lending to unsuitable borrowers. Such guidelines can be seen as part of the business structure of the programme manager (Origin and FirstMac) and mortgage manager (Tonto HL) in the interests of the funds provider and the programme manager. They can be seen also, indirectly, as some protection of putative borrowers who might apply for loans in amounts or under terms unsuitable to them. Such is not to say, however, that the funders owed any legal duty to act in the interests of prospective borrowers. No such submission was put.

All of the loans were in fact approved by the one person… under the FirstMac lending manual and guidelines. …”

The loans
The primary judge made the following findings:

(a) No check was made as to whether the borrowers qualified for Lo Doc loans “as being owner-occupiers or investors who had limited income verification and had been self-employed for two years” .
(b) No searches or enquiries were made in relation to any ABN numbers.
(c) No enquiries were made to confirm that the borrowers were self-employed trading in the same business for a minimum of two years.

“The primary judge found that the failure to follow the lending guidelines made it easier for the fraud of Streetwise to remain undetected. Indeed, had the guidelines been followed with some rigour, it is difficult to see how the loans would have been made. ”

In fact all of the loans were “asset based loans” where the borrowers had no capacity to pay.

In support of his conclusion that the contracts were unjust Judge Allsop emphasised the following:

“254 The central feature that brought about the loan agreements and mortgages was the dishonest conduct of Streetwise in the filling in, and submission of, the various forms and information to Tonto HL. This brought about the contracts which would not have been entered without false information. This was done for the financial advantage of S Property and the principals of Streetwise, to the distinctly possible (at the time) detriment of the lenders and the borrowers.

255 That S Loans was not in law the agent of Tonto HL does not mean that for the purpose of evaluating the operation of the CRA , the position of Streetwise, how it came to take its place in the overall enterprises of the lending programmes and the objective perceptible risk of fraud arising from its position should not be considered.

256 The perpetrator of the fraud was not a stranger to Tonto HL. It was a retained introducer. It was a sought-after commercial counterparty put in place by Tonto HL for the purpose of hoped for introduction of business. It was part of the “shopfront” of the retail business of the enterprise, albeit sub-contracted, and branded as Streetwise. Its role was to introduce business, obtain information in respect of suitable products and bring forward applications. The characteristics of the group of companies to which it belonged gave it its commercial attractiveness to Tonto HL. As a broking arm of a group engaging in property development it had the attraction to Tonto HL of members of the public as customers engaging in property development or buying property from the group and seeking money so to do. It was obvious commercially that Streetwise was obtaining sources of funding for members of the public going into or doing business with it (all funds at settlement being directed to S Property) and thus providing funding directly or indirectly for its projects. One need not be too specific about this. It is sufficient to recognise that S Loans had a significant incentive (beyond the obtaining of commission) for successful applications, and that this was objectively evident to a commercial party in the position of Tonto HL. In a structure based on independent contract without the control over employees, there was an inherent or systemic risk of exaggeration and fraud which came to pass. This was only heightened by the agreement not to contact prospective borrowers until after settlement, which necessarily weakened Tonto HL’s
ability to apply its own credit guidelines under both programmes with appropriate commercial vigour.

257 One legitimate way of analysing the facts is that through S Property, S Loans was the agent of the borrowers. If S Loans had been worth powder and shot any suggestion that it was not acting for the borrowers would have been shortly dealt with. Nevertheless, this legal position should not be over emphasised in the whole commercial context in which the lending took place, in particular the place and function of S Loans in the commercial enterprise of the lending programmes.

258 Whilst the effect of the “badging” of the approvals with the Streetwise logo and name should also not be overstated, its capacity (correctly recognised by the primary judge) to mislead or confuse should not be ignored. As was apparently common in the industry, Streetwise was assisted through the badging (reinforced by the agreement of Tonto HL not to contact prospective borrowers before settlement) to represent itself as closely connected with the lending and as a company of substance. This permitted some of the borrowers to think, at least up until the final loan and mortgage documentation was sent to them, that Streetwise was the lender. Thus, a sense of completeness of disclosure in the customers was brought about, irrespective of the formalities in the various documents that were shown. Once again, this capacity to mislead was created by the structure and operation of the commercial arrangement put in place by Tonto HL.

259 The only clear organisational checks and precautions were the guidelines. Not only were they not followed, but they were disregarded in a way found by the primary judge to reflect a lack of real concern for aspects that underpinned serviceability and the suitability of the borrowers. Of course, lending guidelines such as these are principally the relevant tool to protect the lender’s interests. However, as recognised by Spigelman CJ in Perpetual Trustee Company v Khoshaba [2006] NSWCA 41 at [80]-[82] and Campbell JA in Kowalczuk at 228 [102], following the guidelines confers a direct benefit on a prospective borrower by identifying risky loans and preventing fraud. The failures can be seen to be material in permitting the fraud to occur.

260 There can be no doubt that, to varying degrees, these borrowers were preyed upon by Streetwise, through the blandishments and lies of apparently sophisticated and skilful people. The written page can never fully reflect, in recalled snippets of conversations, the effects of personality, charm, pressure and deception in a carefully orchestrated body of persuasion of ordinary people. That is not to say that the borrowers were not careless, to a degree, foolish and gullible. They all succumbed to the lure placed before them of monetary gain, the lure being made more respectable by its characterisation as the provision for their future and “wealth-building” for their later years. Greed would be too strong a word, and unfair perhaps. But such caution as was initially revealed by them dissolved under the persuasion of, and trust in, Streetwise. These matters went, in particular, to the collateral joint venture transaction. To complete the exercise of deception, a group of lies directed to obtaining the contracts in question was necessary.

261 The above said, the behaviour of the borrowers to a degree militates against any conclusion of injustice. The signing of incomplete or blank documents was careless, giving the opportunity for the fraud. The carelessness also extended to the degree to which the documents were misleading; though, to a significant, indeed overwhelming, degree the causative deception occurred through the dishonesty of Streetwise. …

264 The position of the lenders should not be judged as detached third parties, distinct and separate from what happened. Nor should they be seen as complicit with, or actually knowing of, Streetwise’s deception, fraud and predatory conduct towards the borrowers. Whilst not having actual knowledge or actual notice of Streetwise’s behaviour, the lenders’ position should be assessed by reference to the reality of the significant responsibility of those structuring the elements of the lending programmes or, in the case of Permanent, those providing the wholesale funds. The mortgage manager (Tonto HL) with delegated lending authority operated the guidelines loosely and in a way which reflected a lack of concern with the suitability of the borrowers and serviceability. The mortgage manager brought into the roles of interviewing and selecting prospective borrowers an intermediary whose commercial attractiveness bespoke the inhering risks to which I have referred, heightened by Tonto HL’s agreement not to contact prospective borrowers before settlement. These considerations materially facilitated the ability of Streetwise to effect these frauds.

265 In all the circumstances, these considerations are relevant to conclude that the unjustness of the contracts can be seen as unjustness affecting Tonto HL and the lenders. This conclusion is relevant to the assessment of unjustness and the extent to which the lenders should be viewed as bearing responsibility for what happened and in applying the broad considerations contained in the CRA , founded as they are in justice and fairness. Looking at these events as brought about primarily by the fraud of Streetwise, a fair assessment is that the business structure put in place by the lenders in how it operated was significantly responsible for the preying upon these people by Streetwise. That is not to ignore the basis upon which the trial and appeal proceeded, that “Lo Doc Lending” per se was not unjust. Nor is it to introduce an enterprise concept of agency; rather it is to recognise that a sub-contracted lending structure of the kind here, in which persons such as Streetwise are “chased” to become the introductory agents, should have guidelines enforced with real vigour to deal with the obvious objective risks of fraud and deception. No one criticised these guidelines. Their operation was loose, and affected by the attitude found by his Honour. It is only fair and just to recognise the significant responsibility of the lenders in these circumstances.

266 Unjustness is a not concept or word with immutable or unvarying content. The degree of unjustness here stems primarily from the fraud and procedural injustice of Streetwise. Though not the agent in law of Tonto HL or Permanent, it was, as I have explained, the link in the business enterprise for which, in the sense I have discussed, the lenders, through Tonto HL, should take significant responsibility.

277 In respect of the Di Benedettos, Mr Tavares and Ms Rowe, the order that is appropriate, in all the circumstances of the unjustness, including the public interest to which I have referred, is to relieve them of liability as the primary judge did (recognising the repayment by Mr Tavares and Ms Rowe and amending the orders about the mortgages).

278 From the evidence as to their resources, a substantive share of responsibility for the loans could well deprive them of their homes. In the circumstances of their being misled and preyed upon by Streetwise and all the other circumstances, such a result would be unjust.

279 The O’Donnells are in a somewhat different position. The evidence reveals that Mrs O’Donnell, in particular, expended considerable effort in understanding what the property venture was. Their decision to enter all the transactions was significantly more the result of the exercise of free will than the decisions of the Di Benedettos and Mr Tavares and Ms Rowe. The assessment is not an easy one to make; but I am left with the positive persuasion that it would involve a degree of injustice to the lender to remove all consequences of responsibility for what happened from the O’Donnells. It is, of course, to be remembered that it is the loan agreement that was unjust because of the fraud of Streetwise. Further, Mrs O’Donnell was to a degree misled about the identity of the lender. Nevertheless, they wanted this borrowing to effectuate their considered decision to enter into the arrangement with Streetwise, they having chosen not to make use of their available advisers (accounting and legal).

280 In my view, an unjust consequence (both to the O’Donnells and the lender) would be avoided by relieving them of three quarters of the financial consequences of the loan agreement. To do more would be unjust to the lender…

286 It is unnecessary to resolve finally the question as to the operation of either s 12CB or s 12CC [of the ASIC Act] because, in my view, the conduct of Tonto HL, and through it the lender, cannot be described as “unconscionable”. Section 12CA also therefore should not apply.”