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Lending outside the law?

Miha had a loan from a mainstream bank secured by a mortgage over his lifestyle block. Miha’s bank indicated that it was uncomfortable with the lending, and suggested that Miha refinance. Miha asked a mortgage broker for help. The mortgage broker put an offer to Miha that Miha knew would stretch him financially. The lending offer also required Miha to borrow in the name of a family trust.

Miha took the proposal to his lawyer, who advised Miha he was concerned about the lending. However, Miha felt he had no choice. His options were to either refinance or face a mortgagee sale. The loan was only for a year and Miha intended renovating the property and selling it within a year, allowing him to repay the lender.

Shortly after drawing down the loan Miha was diagnosed with a terminal illness and was unable to either complete the renovations or work. The loan fell into arrears and the lender began mortgagee sale proceedings.

Miha complained to FSCL that the lender should not have approved the lending in the first place. Miha said the lender knew he was an individual but had asked him to borrow in the name of a trust to avoid the responsible lending obligations in the Credit Contracts and Consumer Finance Act 2003 (the Act). The Act’s responsible lending obligations do not apply to loans made to a trust. Miha said that even if he had not become ill, the loan repayments were unaffordable.



The lender denied advising Miha to form a trust to avoid responsible lending obligations. The lender provided a copy of the first loan application submitted and noted the lending was originally to a company.

The lender also said that when it became aware that Miha was unable to work, it offered to consider an application for hardship relief, even though it was not obliged to do so under the Act. Miha did not submit an application and because the loan was in arrears, the lender had little option but to start mortgagee sale proceedings.

Miha said that a senior executive from the lender visited his home shortly after the lending was finalised to view the security. During the course of that meeting the executive told Miha that the lender had to lend to a trust to avoid the restrictive lending criteria imposed by the Act. Miha maintained that the lending should never have been approved because the lender knew he could not afford the loan and that the lender’s actions indicated a serious problem within the lending industry. 



As soon as we became involved, the lender agreed to stop its mortgagee sale proceedings.

We were concerned at the allegation that the lender had advised Miha to form a family trust to allow it to lend on terms outside the Act’s responsible lending guidelines. But when we reviewed the lender’s file, there was no record in any diary notes or correspondence between the lender and the mortgage broker to support Miha’s allegation that the lender required the loan to be to a trust to avoid its legal obligations to an individual.

On the information available we were satisfied that this was a short-term commercial loan intended only to allow Miha to renovate and sell the property. We noted that Miha had legal advice, and that if he had not proceeded with the loan the bank would likely have mortgagee sold the property in any event.

While our investigation was underway, Miha was able to successfully refinance his lending with another lender. To allow the refinancing to take place the lender agreed to refund all the default interest that had accrued on the loan.



We explained to Miha that the responsible lending obligations did not apply to him because the loan was to a trust and that we could not find any evidence to support his allegation that the lender was deliberately avoiding its responsible lending obligations. We advised Miha that the lender’s offer to refund the default interest seemed to be a good outcome for him. Miha accepted our advice and agreed to discontinue his complaint.


Insights for consumers and participants

The Act’s responsible lending obligations only apply to natural people. Many people place their homes into family trusts not appreciating the impact this will have on a bank, or another lender’s, assessment of the loan. In our view, lending to a family trust is very often exactly the same as lending to a natural person and the law should reflect this.