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LPLC: swimming with the sharks

Every Issue

Cite as: (2009) 83(02) LIJ, p.78

Practitioners are urged to beware the short-term loan as there are a number of mortgage and loan transactions that bite.

Claims against lawyers arising from mortgage transactions are on the rise, and practitioners need to remain vigilant to avoid being unwittingly drawn into transactions that, objectively viewed, are “claims waiting to happen”.

Loan sharks

There are a growing number of claims against practitioners arising from litigation concerning short-term loans. The claims are not confined to cases of fraud, but frequently concern sharp practice by marginal lenders and finance brokers involved in refinancing large loan sums. The loans tend to be short term, sometimes as little as a few weeks but more commonly from three to six months.

These are “asset loans” with high interest rates made to desperate borrowers where the lender makes only cursory checks about the loan purpose and the borrower’s capacity to service interest repayments. The decision to lend is focused almost entirely on the value of the property.

This type of lending relies on a continually rising property market to provide the growth in values to support the spiralling debt levels. When that growth plateaus or stops, the only way to repay the loan is through a sale of the property.

The current scarcity of credit is driving more and more desperate borrowers into the jaws of loan sharks. These transactions pose obvious risks for the contracting parties: the borrower defaulting on the loan or the lender not being able to recover the debt. But there are associated risks for legal practitioners of being drawn into litigation as a convenient “deep pocket” defendant, when the short-term loan turns sour.

The reality is that marginal lenders take commercial risks which they attempt to pass on to legal practitioners. The script of these claims is familiar: when the high-risk, short-term loan goes bad, the borrower looks for any available avenue to prevent the lender from realising the security.

A recent increase in Amadio-style claims is one manifestation of this.

Third party or guarantee mortgages pose particular risks. Lawyers acting for mortgagors must take care to inquire about the underlying purpose of the loan and ascertain the benefit to the mortgagor of entering into the transaction.

Lawyers acting for lenders need to be alive to the risk of taking third party security as lenders will quickly blame their own legal representatives for failing to protect their interests. This is particularly so if it should later turn out that the transaction was not in fact as it was represented to the lender.

Lawyers acting for lenders also need to make sure that the mortgage security taken for the transaction is promptly registered, in order to secure the benefit of indefeasibility of title on the mortgage.

Brokers

A broker is retained by a borrower, but often has a close association with the loan-shark lender.

The broker’s interest in completing and settling the transaction is commission-driven. The interests of the borrower client and the broker do not always coincide.

Sometimes the broker is authorised by the lender to pre-approve loans, which raises further questions about the broker’s independence from the lender. For the lawyer acting for a borrower, all of this means that relying on instructions from a broker on behalf of the client can be fraught with risk, and personal contact with the borrower client on all significant matters (including instructions for disbursement of loan proceeds) is vital.

Practitioners ought to be suspicious of any loan transaction where a positively identified borrower is not providing direct instructions.


This column is provided by the LEGAL PRACTITIONERS’ LIABILITY COMMITTEE. For further information ph 9670 2001 or visit the website www.lplc.com.au.

High risk mortgage transactions – a summary

There are telltale indicators of problem loans and mortgages. They commonly display some of the following features:

  • a family affair: an adult child taking advantage of elderly parents, or one spouse against another;
  • a lost or missing duplicate certificate of title and an application for a replacement duplicate title;
  • an intermediary is actively involved “assisting” and providing instructions on behalf of the borrower (including lame excuses about why the unseen borrower is unable to attend the solicitor’s office);
  • transactions completed through the use of a power of attorney;
  • certification of identification which has not relied on photo ID;
  • certification is being provided to a new client who has not come via a reliable referral source;
  • an urgent short-term loan at a usurious interest rate with a high-risk lender, often with interest prepaid at settlement and included in the sum advanced; and
  • settlement money being paid to a third party.

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