Insights for consumers
If you are asked to sign loan documents urgently, especially if you have not been involved in the borrowing before, it is important to understand exactly what you are agreeing to and what your obligations will be.
Becoming a co‑borrower can expose you to personal liability and affect your credit record. Even under time pressure, documents should be clear about your obligations and borrowers should have an opportunity to obtain independent advice.
Insights for lenders
Communicating directly with all parties signing or providing security helps ensure decisions are informed and fair, especially when time pressures or power imbalances exist.
The Credit Contracts and Consumer Finance Act 2003 (CCCFA) defines what credit contracts will be considered a ‘consumer credit contract’. Lending for investments, or where trustees of a trust are borrowers, will not be considered a consumer credit contract. Business lending has fewer protections under the law.
Terry takes out a business loan repayable on house sale
Terry* borrowed money, under his business, from a non-bank lender to prepare an investment property for sale. He also had a business loan and mortgage with a bank. Terry was to repay the non-bank lender (lender) the full loan balance of the business loan when his house, which was on the market, was sold.
The bank also needed a business loan to be repaid
When Terry’s house was due to settle, the bank required the entire amount to repay the business lending the bank had provided, leaving no funds for the lender.
Terry’s wife agrees to provide her trailer as security for the loan
The lender required alternative security before they would agree to release a caveat it had placed on Terry’s property, so that the house sale could proceed. Because the situation was urgent, Terry’s wife Alex agreed to provide her trailer as security and signed the updated loan documents.
Alex didn’t know she was a co-borrower
Alex later said she did not realise she was becoming a co-borrower and had no real opportunity to read the documents or get independent legal advice before signing.
Alex is worried about how the lending will affect her
After refinancing, Terry defaulted on loan payments. The lender took steps to enforce their security. Alex became concerned about her credit record and the risk of losing the secured assets.
Alex is unhappy with the lender’s conduct
Alex complained to FSCL about the circumstances in which she was added as a co-borrower, the time pressure, and the lender’s conduct.
Alex said the lender should have contacted her directly before asking her to sign the loan documents and provide security, informed her that she was becoming a co‑borrower, and given her time to get advice. She felt pressured by the property settlement deadline and did not think it was fair that she was asked to provide security for a business loan that did not involve her.
The lender believed they acted appropriately
The lender said they were entitled to seek alternative security when the loan was not repaid from the house sale proceeds and relied on the representations in the loan documents. The lender said the lending was business-related and that the security and documentation were appropriately dealt with in the circumstances.
FSCL investigates the refinancing
After reviewing all the information, we noted that Alex benefited from the loan, as it was to improve an investment property she had an interest in as a trustee and a beneficiary. However, the lender did not follow good practice in the way they involved Alex in the refinancing.
We thought the lender should have contacted Alex directly, explained the documents, and ensured she had a genuine opportunity to obtain independent advice, especially given the urgency, and that Alex had not previously been involved in the borrowing.
Balancing the benefits Alex received against the lender’s conduct, we considered the complaint should be partially upheld and we suggested a way to fairly resolve it.
What was the outcome of the case?
The parties agreed to settle the complaint. Under the settlement, Alex retained ownership of the trailer by purchasing it with new finance provided by the lender.
The lender agreed:
- to remove Alex as a co‑borrower for the original loan
- not to pursue her for any remaining debt under that loan, and
- to arrange for her credit record to be corrected to remove the default linked to that borrowing.
The lender reserved their rights against Terry’s borrowing and any related business.
We considered the settlement to be fair and balanced the rights and obligations of both parties. The complaint was closed by agreement.
