Factory finance fast
In March 2016 Terence urgently contacted a mortgage broker (the broker). Terence’s company, Terence’s Transistors, had run into financial difficulty and Terence needed to re-finance his expiring factory mortgage of $690,000.
Terence worked with the broker who helped Terence to complete a detailed statement of position. The broker put in an application with a reputable second-tier lender (the lender). The lender reviewed Terence’s application and made a formal offer of finance. The lender’s offer was for a loan of $882,000, from which the following deductions were made:
- $695,000 to refinance the factory
- $17,700 in fees to the lender
- $20,300 in fees to the mortgage broker
- $20,396.25 in interest due to the lender
This left Terence with further working capital of $129,000. Terence was happy with these details and accepted the offer, signing an agreement with the lender.
A week later, Terence contacted his existing lender to arrange repayment of the old loan and found that he actually owed $934,000. Terence had not factored in interest and costs into the repayment of his mortgage.
Terence contacted the broker and told him of his mistake. Terence now needed more money and offered to put up a residential property as security with the factory.
Terence then decided not to proceed with the loan from the new lender that the broker had arranged. Terence felt there would be no point as it would not cover the existing debt. Terence asked the broker to explore other finance options.
Unfortunately for Terence, the broker could not find any other finance available. In July 2016 the broker advised Terence that it would be in his best interests to sell the factory before a mortgagee sale was forced on him.
Terence marketed the factory for sale and in December 2016 found a buyer willing to pay $1,200,000. Terence arranged the sale but found that the new lender had registered a caveat against the title to the factory for $58,396.25 made up of $17,700 in fees to the lender, $20,300 in fees to the broker and $20,396.25 in interest due under the agreement that Terence had signed in March 2016.
Terence negotiated with the lender and, as settlement day drew near, Terence agreed to pay the lender $44,000 to release the caveat.
Terence’s view
Terence was disappointed he had to pay $44,000 in fees and charges for a loan that he never drew down. Terence complained to FSCL as he felt this was unfair.
Terence wanted the lender to repay him the $44,000 or for the broker to refund part of their fee. Terence said he had never been told that fees would apply regardless of whether he drew down the loan, that the broker’s fee was high and that the finance arranged for him was not suitable.
Review
We investigated Terence’s complaint and found that the brokerage commission of 2% of the loan was standard and reasonably reflective of industry practice for arranging and implementing a commercial finance offer of close to $900,000.
We found the broker had made full disclosure to Terence of all the documentation involved in the loan and had also explained the fees that applied to the arranging of the finance.
We looked into the information that Terence had given to the broker and found that the broker had arranged the finance on the basis of that information. We considered that it was Terence’s obligation to provide up to date and accurate information to the broker so that the broker could ensure that the finance arranged was suitable.
On the evidence, the finance arranged by the broker would have been suitable, had Terence’s company been in the financial position described to the broker.
We found that although the loan offer was put together promptly, Terence had sufficient opportunity to consider the loan terms and to take legal advice on the effect of signing the loan offer. Terence had decided to sign the offer without taking legal advice and we felt that, in the circumstances, there was no reason for Terence or his company to be released from the contract with the new lender.
Outcome
We were satisfied that the broker had fully disclosed all relevant terms and fees to Terence and that the lender and broker were entitled to charge the fees under the contract. Terence accepted our findings.
Our insight
Finance brokers usually take a brokerage commission on the value of any finance organised. Brokers may also charge an upfront fee to cover the costs of organising the finance.
It is very important to read and understand the terms of any finance contract before you sign it as there may be fees attached even if the contract is cancelled early or the loan is not drawn down.
