Three years ago, Lee and Brian bought a house for around $550,000. They had saved a deposit of $150,000. They initially borrowed the balance of the purchase price from a bank, but they ran into financial difficulties when Brian was made redundant. They refinanced with an interest-only mortgage from a non-bank lender, agreeing to pay around $3,000 in loan payments on the 1st of each month.
Unfortunately, Brian was made redundant again, and the couple defaulted on their 1 July loan payment. The lender demanded payment of the outstanding amount, plus penalty interest (of almost $2,000) and a default fee. Lee and Brian paid the outstanding amount and the default fee on 17 July, but they disputed the penalty interest. They then defaulted on their 1 August loan payment.
On 30 August, the lender issued a Property Law Act (PLA) notice to Lee and Brian. According to the PLA notice, Lee and Brian had to pay almost $450,000, made up of the full amount of the mortgage, plus various amounts of interest and fees, by 2 October. Under the PLA notice, the lender would proceed to a mortgagee sale if the amount demanded was not paid. Lee and Brian were overwhelmed by this demand; they could not pay $450,000. The lender proceeded with a mortgagee sale, and sold the property for around $500,000. Once the lender’s debt was repaid, Lee and Brian walked away with only about $10,000.
Lee and Brian complained to FSCL.
The essence of Lee and Brian’s complaint was that the lender had sold their home too cheaply. The lender disputed that, saying it had used a respected real estate firm, that the house was sold by auction, and that there was more than one bidder on the day.
We could not see any obvious flaws in the sales process itself. We noted that properties sold by mortgagee sale almost inevitably yield less than if sold in a willing seller/willing buyer situation.
However, we noticed significant defects in the PLA notice. The law says that a lender can only make demand in a PLA notice for amounts that are actually outstanding (the payments the borrower had defaulted on, plus any associated default interest/fees). The total amount owing under the mortgage only becomes payable if the borrower does not pay those outstanding amounts. In this case, the PLA notice said that the total amount owing under the mortgage was payable. But that was simply incorrect. We considered that the lender could legitimately only have made demand in the PLA notice for around $4,400 (the default amounts), not $450,000 (the total amount owing under the mortgage).
The PLA notice contained other errors too. For example, penalty interest was incorrectly calculated. We could see that this mistake had been made shortly after the 1 July payment default – the lender demanded almost $2,000 in penalty interest, when in fact it was only entitled to demand around $20 (and it was not entitled to demand a default fee – meaning that, unbeknownst to them, Lee and Brian brought themselves up-to-date with their 17 July payment). The mistake had been carried through into the PLA notice.
It appeared that the lender had incorrectly treated the loan as a business loan, when making demand for payment, rather than a consumer credit contract.
Overall, we considered that the errors were so significant that a court would likely have deemed the entire PLA notice invalid. We wondered if history might have taken a different course had Lee and Brian known they had to pay only $4,400. Perhaps they could have come up with that amount or taken steps to agree with the lender that they could sell the property themselves. We also noted that it may never have got to that point had the lender made a demand for the correct amount after 1 July.
We considered that the lender should refund the interest and fees that had been (incorrectly) demanded in the PLA notice and deducted from the house sale proceeds, a total of about $21,000. We also invited the lender to make a settlement proposal to Lee and Brian, bearing in mind the material defects in the PLA notice and the mistakes in the original demand for payment. The lender took a principled approach to our suggestion. Without admitting liability, the lender made a payment to Lee and Brian of around $155,000. For Lee and Brian, this effectively put them back in the position they were in three years earlier, when they had $150,000 saved for a deposit. This was a life-changing outcome for Lee and Brian.
Insights for participants
It is very important to make sure that a PLA notice complies with the law and that it correctly sets out what a borrower must pay. Consumers are entitled to rely on the accuracy of PLA notices, as they have to make, often very significant, decisions based upon them.