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Confusion, a lack of records, lost opportunity, and stress

In early 2021 Arjun wanted to buy an investment property (property A) by borrowing against his existing home. Arjun also had $300,000 in cash savings to spend on renovating property A so he could run a small business from the premises. Arjun sought advice from a mortgage broker to assist him in securing finance for the project.

In March 2021, a lender pre-approved lending and, in April, Arjun purchased property A with settlement set for a few months later. In the meantime, Arjun thought more about the project. Property A was on a cross-lease with the property next door (property B). He approached the neighbours and they agreed to sell him property B. Before settlement on property A, the broker told the lender that Arjun was looking to also buy property B as an ‘amended request’.

Unfortunately, the broker’s communication with the lender was unclear and the lender thought that Arjun was no longer buying property A, but instead buying only property B. Eventually, the error was discovered, but Arjun was short on funds to complete the purchase of property B. Arjun said the broker assured him that if he put his $300,000 towards the purchase, the broker would be able to get him a construction loan of $300,000 for the renovations. Arjun bought property B.

Arjun seeks a loan for the renovations

In early 2022, Arjun talked to the broker about getting a loan for the renovations. Arjun sent the broker renovation plans from a builder and architect, which had cost Arjun $10,000. In March 2022, the lender pre-approved a renovation loan of $300,000, conditional on Arjun obtaining a fixed price for the building work, within 3 months, by June 2022. 

In May 2022, a builder quoted Arjun $680,000 for the renovation work, more than double the pre-approved renovation loan. Arjun asked the broker to seek an extension because the June 2022 condition deadline was looming. However, the broker did not seek the extension; he thought it unlikely the lender would agree to extend. The broker did not tell Arjun he had not sought an extension.

By this time, approximately a year on from when Arjun had purchased the properties, the lending environment had changed. The properties’ values had reduced, interest rates had increased, and Arjun’s income had also been affected by Covid-19 lockdowns. Arjun was now unable to obtain a renovation loan, and he complained about the broker to FSCL.

Dispute

In summary, Arjun was unhappy with the broker’s service. Arjun said the broker had caused him to be in the position where he originally had savings of $300,000, to then having pre-approval to borrow $300,000, to eventually having no funding for the renovations. Arjun said if he’d known he wouldn’t be able to get the renovation loan, he would not have bought property B. Arjun also said the broker should have asked the lender to extend the renovation loan pre-approval. He would have then been able to get a fixed price from the builder in the $300,000 price range, based on a partial renovation, and obtained another loan in the future to complete the renovations. To resolve his complaint, Arjun wanted the broker to pay him the $10,000 he’d spent on the building plans.

The broker said he had not assured Arjun that he’d be able to get the renovation loan, and that he thought Arjun would always have bought property B anyway. The broker also said that although he had not asked for an extension of the pre-approved renovation loan, this did not change Arjun’s situation; the lender would never have agreed to the extension. To resolve the complaint, the broker offered Arjun $3,000 as compensation for stress and inconvenience, but Arjun did not accept this.

Review

We said that the complaint should be settled, and made the following findings:

  • The broker didn’t keep adequate records, and that this was a breach of the financial advice provider (FAP) licence he operated under. For example, the broker had not kept an adequate record in a statement of advice before Arjun bought the properties about what Arjun’s plans and goals for the project were (a statement of advice was produced after the purchase of both property A and B settled). There was also no file note of any discussion about how likely it would be Arjun could obtain a renovation loan, before Arjun put the $300,000 toward the purchase of property B.
  • The lack of records made it more difficult to investigate the complaint, and raised red flags that the broker may not be meeting their record keeping requirements more generally in their advice process. We asked the broker’s firm to audit a random sample of five of the broker’s advice files, to check whether there was a systemic issue. The firm did the audit, and we were satisfied that the poor record keeping in Arjun’s case did not appear to be a more widespread problem.
  • It was clear that Arjun could not have purchased both property A and B and retained the $300,000 cash for the renovations. We could not say for certain whether Arjun would have bought both properties if he’d known it would be difficult to obtain a renovation loan and it wasn’t clear what the broker may or may not have told Arjun about the chances of obtaining a renovation loan. However, we noted the broker did manage to obtain the pre-approved $300,000 renovation loan. Unfortunately, the quote for the full renovation work was more than twice the pre-approval amount – but this was outside the broker’s control.
  • It was unlikely the lender would have agreed to Arjun borrowing $300,000 for only half the costs of renovations. However, there was a chance that, if the pre-approval extension had been sought, the builder could have come back quickly with a fixed price contract in the $300,000 price range. We said Arjun lost that chance, when the broker failed to tell Arjun he had not asked for the extension.
  • In the broker’s disclosure documents, it said he only advised on ‘home lending’. However, the broker knew there was a commercial element to Arjun’s plans by at least early 2022 when Arjun was applying for the renovation loan. The broker should have told Arjun he was not a commercial lending specialist and, by not doing so, Arjun had lost the opportunity to consult a specialist commercial lending broker, which may or may not have resulted in a different outcome for him.

Resolution

Based on the shortcomings in the broker’s process, we said he should contribute half the costs of the building plans ($5,000); Arjun could possibly still make use of those plans in the future. We also said the broker should pay $4,000 as compensation for the lost opportunities Arjun had suffered, both when the extension was not sought, and when the broker failed to refer Arjun to a commercial lending specialist. Arjun accepted our final decision, and the broker paid him $9,000 in compensation.

Insights for participants

This case highlights why the record keeping requirements under FAP licensing are so important. If the broker had kept records, we may have placed more weight on his views, and the outcome of our investigation could have been different.