Understand your rights as a borrower

If you've received a loan that you’re struggling to repay or you have defaulted, you may have a claim for compensation against the lender if it failed to recognise that your loan was unsuitable for you at the time it was entered into.

Record low interest rates combined with record high real estate growth have led to a huge increase in mortgage lending over the past decade. Household debt in Australia is now amongst the highest in the world.

Following the Global Financial Crisis in July 2010 the National Consumer Credit Protection Act 2009 (National Credit Act) imposed responsible lending obligations on lenders that require them to assess whether a loan is unsuitable considering the consumer’s requirements, objectives and financial situation.  That is, credit is only to be given to consumers when it is suitable for them.  This includes ensuring that:

• the loan meets the customer’s requirements and objectives
• the customer can afford to repay the loan without substantial hardship.

If a consumer can only comply with the financial obligations under a loan contract by selling their principal place of residence, it is likely that that the loan will be considered unsuitable.

Lenders that give an unsuitable loan can be made to compensate the consumer if loss is suffered as a result.

Lenders don’t always get it right and the consequences can be devastating for borrowers who can lose their home and face bankruptcy.

It is important to get advice before selling your home or investment property, or before entering bankruptcy.

What are your rights as a borrower?

The National Credit Act requires lenders and brokers to offer credit only when the customer can meet the repayments without substantial hardship, without selling their home, and the proposed loan meets their requirements and objectives.

Under the National Credit Act, a lender must:

• make reasonable inquiries about a customer’s requirements and objectives
• make reasonable inquiries about a customer’s financial situation
• take reasonable steps to verify the customer’s financial situation.

Many lenders have failed to establish accurate processes to determine the suitability of a loan. If your bank or mortgage broker provided you with credit that you couldn’t repay, resulting in financial hardship, you may have a claim for compensation. 

How do I know if I have received an irresponsible loan?

The following are warning signs that your lender may be in breach of responsible lending laws:

• the lender failed to make enquiries to ensure that your loan was suitable for your requirements or objectives
• the lender failed to verify your reliable income in your loan application, e.g. it included bonuses or overtime, or it failed to obtain PAYG records
• the lender did not ask you about your actual living expenses or obtain statements but instead determined your monthly expenses based on a benchmark tool like the Household Expenditure Measure
• you were suffering from illness, were elderly, or did not understand English when you applied for the loan
• you were given an interest only loan that you are struggling to repay since the interest only period ended or you will struggle to pay at that time
• your interest only loan had an interest only period of greater than 5 years
• your home was used as security for a loan used to buy an investment property
• the loan was for more than the value of the investment property
• the lender did not ensure that you could still repay the loan if your interest rate increased
• the lender failed to properly consider your existing debts
• the lender over-estimated the rental income returns from an investment property that you were planning to buy with the loan
• your ability to repay the loan was reliant on rising house prices.

Interest only home loans

Banks and mortgage brokers have recently come under intense scrutiny for granting interest only home loans.  These are loans that have an initial period, usually 5 years, where only the interest on the loan is repaid.  However, after the interest only period ends, the loan repayments can increase between 30% and 60% which can push the borrower into mortgage stress.

As at 2015, interest only home loans accounted for almost half of all new home loans.

Research has shown that up to one in three borrowers may not understand that they have an interest only home loan or that their obligations will increase substantially after the initial interest only period.

If you entered into an interest only home loan we encourage you to contact us for advice, even if you are up to date on your repayments.

Financial services dispute case: NAB Lending misconduct

In November 2017 NAB sacked or disciplined over 50 of its banking staff for breaching its home loan lending policies.  NAB lending admitted that as a result of these breaches, thousands of mortgages it issued to customers may be based on inaccurate information.

This followed a report from investment bank UBS in September 2017 which found that Australian banks have issued about $500 billion of mortgage debt based on inaccurate or unreliable information about the borrower’s ability to make repayments. That equates to close to one-third of home loans.

NAB’s misconduct follows a string of scandals in Australia's banks over recent years, and a recent debate about how thoroughly banks verify the information provided by customers.

NAB loans could be in breach contraventions of the responsible lending provisions of National Consumer Credit Protection Act 2009 (Cth) (the National Credit Act).

The National Credit Act provides consumer protections to ensure that credit providers make reasonable inquiries about a borrower's financial situation and assess whether a loan contract will be unsuitable for the borrowers.

NAB says it wrote to affected customers, requesting they participate in a review of their loan. It told the corporate regulator ASIC about the problems in late 2015.

If you are struggling to repay or if you have defaulted on a NAB home loan or were offered a loan review by NAB, you may have a claim against the lender if it failed to recognise that your loan was unsuitable for you.

We've helped our clients successfully claim compensation and have debts waived. Speak to one of our expert financial advise dispute lawyers about your rights and find out how we can help you.