Aleki and his accountant are trustees of his family trust. The trust owned two properties – Aleki’s family home, and a section of land. On 7 January 2022, the trust borrowed $850,000 from a lender, secured by first mortgages over the home and the section. The loan’s purpose was to refinance an existing loan to another lender that the trust had been unable to pay.
The new loan included a 2% lender fee of $17,000 and was to be repaid on 7 December 2022. Each month, the trust would make interest only payments. The intention was that the section, with a market value of approximately $900,000 in January 2022, would be sold before 7 December 2022 and the loan principal would be repaid in full.
In July 2022, Aleki asked the lender to lend the trust a further $34,000. This was to cover a further four months of interest payments, and another 2% lender fee of $18,000 was charged. The section had conditionally sold, but the four months was needed for the sale to go unconditional. Unfortunately, the sale fell through.
With the date to repay the loan principal looming (7 December 2022), in October, Aleki reluctantly arranged for his family home to be auctioned. A conditional $1.25M offer was made. If accepted, the trust’s loan would be repaid, and there would be some funds left over. However, Aleki had obtained a registered valuation a few months earlier saying the property was worth $1.85M, and Aleki did not want to accept the offer.
Aleki then complained to the lender saying the loan had been unaffordable from the outset, and that he had no way of paying the loan principal sum by 7 December. Aleki wanted to reach a reasonable resolution with the lender, but when he was unable to do this, he complained to FSCL.
Dispute
Aleki’s view was that the lender had failed to meet the responsible lending obligations in the CCCFA, particularly to ensure the trust could afford the lending. He also considered the lender’s fees were ’extortionate’. The lender’s position was that because the lending was to a trust, the CCCFA did not apply. This meant that the lender’s responsible lending obligations did not apply to loans to a trust and the CCCFA’s reasonable fee provisions also did not apply.
Review
We explained to Aleki that the lender was correct: the CCCFA did not apply to the loan. This is because section 15(1)(c) of the CCCFA says that: ‘a credit contract under which the debtor is a trustee acting in his or her capacity as a trustee of a family trust’ is not a consumer credit contract.
Aleki said that the trust was simply an asset protection mechanism and not a ‘trading’ trust. However, this did not make any difference: section 15(1)(c) simply says that the Act does not apply to a loan where the borrower is a family trust, and Aleki’s trust was a family trust. The Act does not differentiate between loans to a family trust and loans to a trading trust.
Despite this, a non-consumer loan still needs to have some degree of affordability. On the face of things, it appeared reasonable that the lender advanced the loan. This is because when it was advanced in January 2022, there appeared to be every chance the loan would be repaid on the due date – the section was valued at around $900,000 at that time, and the lender said the trust also had other net wealth. The problem was simply that the section failed to sell and, by the end of 2022, its value had decreased due to market conditions.
In relation to the fees, we asked the lender whether they’d be prepared to reduce the amount they charged as a lender fee for the ‘top up’ in July 2022. The lender considered the fee was justified, because securing the top up required as much work as when they originally advanced the loan. However, in the interests of trying to resolve the complaint, the lender offered to reduce the July 2022 fee by $4,500.
Resolution
Unfortunately, Aleki did not accept the lender’s offer. He then disengaged with our process, and we were unsure whether he had, in the end, accepted the offer to purchase his family home. The lender then started recovery action under the Property Law Act to recover the debt.
Insights for consumers
This case highlights the different lending laws and rules that apply when borrowing through a family trust. As with Aleki’s case, often a family home will secure lending to a family trust. However, because the responsible lending consumer protections afforded by the CCCFA do not apply where lending is to a family trust, this increases the risk of losing the family home and other assets, if the trust cannot repay the debt.
