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Credit card debt – payment personal loan with daughter as co-borrower – loan for daughter’s benefit – provider of other security – Code of Banking Practice clause 3.6 – independent legal advice
Ms R’s daughter, A, was experiencing financial difficulties. Ms R agreed to assist A in obtaining a personal loan from Ms R’s bank in order to pay A’s debts. The loan was approved, with Ms R signing the loan agreement. A was a co-borrower. Ms R already had a home loan with the bank, which held a mortgage over her house. The bank then paid the loan funds to A.
About a year later A stopped paying off the loan. The bank then told Ms R that she would have to start paying the loan to avoid recovery action being taken against her, including a possible mortgagee sale of her house.
Ms R’s solicitor complained on her behalf, firstly to the bank and then to me. He said that Ms R was not able to read very well, and would not have understood what she was doing when she signed the joint loan agreement. The solicitor noted that Ms R had not received any independent legal advice at that time.
Ms R said that she thought that she was “going guarantor” for A. She had thought that A would pay the loan and that, if she failed to do so, the bank would pursue A for the money up to the stage of court proceedings and bankruptcy, if necessary. Ms R said she had believed that she would be asked to pay only if the bank was unable to recover the loan payments from A. Even then, Ms R said, she did not realise that her house could be sold if she also failed to make the payments.
I considered that, when Ms R entered into the loan agreement as a co-borrower, providing her property as security for the loan, but receiving no personal benefit from it, she was a “provider of other security”, in terms of clause 3.6(a) of the Code of Banking Practice. By failing to advise Ms R that she should seek independent legal advice before signing the loan agreement, the bank had accordingly breached its obligation to her under the Code of Banking Practice, and may also have engaged in misleading conduct under the Fair Trading Act 1986.
On the other hand the bank contended that, as Ms R was identified as a co-borrower on the loan agreement, she was jointly liable for the loan, and the term “provider of other security” accordingly did not apply to a customer in her position. The bank argued that clause 3.6 in the Code was intended solely to cover a situation when a non-customer provides security for another person’s loan.
It is my view that, in accordance with the spirit of the Code, the term “provider of other security” should be given a wide and liberal interpretation. I believed that the safeguards provided in clause 3.6 were clearly intended to apply to any person (irrespective of whether they are a customer of the lending bank) providing security for a loan when, on the basis of the facts known to the bank, they derive no direct benefit from it. In this case the bank knew that Ms R was not receiving any personal benefit from the loan in question. The bank had failed to advise Ms R to seek independent legal advice when she signed the loan agreement as a co-borrower, and accordingly it had breached its obligation under the Code.
I had proposed to recommend that Ms R should immediately stop making the loan payments, and that she should only be asked to start paying them again if the bank was unsuccessful in pursuing A. I initially expected the bank to take all available courses of recovery action against A, to the extent of bankruptcy if necessary. However, I accepted the bank’s further argument that to pursue A to bankruptcy would be asking it to go beyond its usual debt recovery process. The bank said that its standard recovery action would be to serve A with a demand to pay the loan. If she then either defaulted or did not recommence the loan payments, it would refer the debt for recovery action. A would also receive an adverse credit listing.
I accepted that I should not require the bank to take unusual steps in pursuit of A, the principal debtor. The bank would accordingly proceed to seek repayment of the loan from A in accordance with its standard approach. It would ask Ms R to start paying the loan again only if it was unsuccessful in having A resume the loan payments. The bank also said that it would treat the loan as unsecured, meaning that it would not enforce the sale of Ms R’s home.
I also considered that the bank should pay Ms R compensation for inconvenience for the anxiety it had caused her when she discovered that she could be asked to start paying the loan immediately when A stopped her payments. She had been more than a little shaken by the bank’s advice that her own house was at risk in the event of total default. Ms R had also suffered stress and anxiety from having to find the funds to service A’s loan over a period of some months, losing the use of that money herself during that period. I recommended that the bank pay compensation for inconvenience in an amount of $2,000. I also recommended that the bank reimburse Ms R for the legal costs that she had incurred of approximately $840.
The complaint was settled on this basis.