The Duty of Banks to Protect Borrowers

It is not widely understood that although banks and other lenders are entitled to advance their own commercial interests in making loans; they also have obligations to borrowers which, if breached, might result in a loan agreement being declared void.

A recent NSW Supreme Court case of Satchithanantham illustrates one aspect of the duty owed to borrowers.

The case was factually complex but, in essence, the borrower, Mrs S, was prevailed upon by her (bankrupt) husband to take out a loan, secured by mortgage on the family home. The Court held that when the loan application was signed, the bank officer involved did not make adequate enquiry about the stated purpose of the loan or as to Mrs S’s capacity to repay the loan.

As it happened, the Court also held that Mrs S had been deceived (by her husband) into believing the loan was an ‘ordinary’ home loan for a specific amount – in fact it was a line of credit for a substantially greater amount and which could be cancelled at any time whether or not repayments were in default.

When the line of credit was eventually cancelled, the bank sought to repossess the house that was security for the loan.

The Court ultimately held, on various grounds which included the failure of the bank officer to properly enquire into Mrs S’s capacity to repay; or to inform her of the true nature and amount of the loan; that the bank could only recover approximately $400,000.00 and not the full amount claimed by the bank (which was more than $600,000.00).

As the Australian economy slows, an increasing number of people will have difficulty servicing loans and, in some cases, they may be pursued by their lender for repossession of their home and/or for repayment of the loan in full. Depending on the circumstances in which the loan was originally granted, borrowers in such difficult circumstances may have a means of setting aside the loan, or at least of reducing the amount that has to be repaid.

Tony Cavanagh is a partner at Mullane & Lindsay, and practises extensively in commercial and other litigation. We are available for consultations at our Tea Gardens office each Monday, Wednesday (by appointment) and Friday between 2:00 pm and 5:00 pm at 191 Myall Street Tea Gardens or at our Newcastle office at any other time during business hours (T: 4928 7300).