“it is not ordinarily incumbent upon a lender to evaluate the commercial merits of the underlying transaction, other than for evaluating the lender’s own credit risk.”1
4.1 To gain as full a picture as possible of industry practice, the research team sought to consult with lenders and their peak bodies. There is very little information available to indicate how often third party guarantees are enforced, or the grounds upon which guarantors rather than borrowers are pursued for guaranteed debts. Anecdotally, it seems that the incidents of bad debts being enforced by recourse to third party guarantees are relatively few. The research team considered solid statistical information of this kind very important in understanding the whole climate of guarantee transactions, and not just the “problem cases” which appear in the law reports and newspapers.
4.2 The research project asked lenders (banks, building societies, credit unions and other financiers) to provide us with aggregated data or estimates about loans secured by third party guarantees on a confidential basis. We asked for information on the number of third party guarantees that are given in a set period, the number or proportion of such guarantees that are supported by residential properties as security, the number or proportion of such guarantees that are called upon and the number or proportion of such guarantees that are disputed.
4.3 The term “bank lender” is used to differentiate the large banks from other lenders. We were particularly concerned to hear from banks, as they were the source of the overwhelming majority of loans guaranteed in Belinda Fehlberg’s UK study,2 and likewise were the major lenders reported by our guarantors.3
4.4 Despite undertakings of confidentiality and assurances that the aim of this research is to provide greater certainty in the lending environment and ease burdens on those involved in financing small business enterprises, the response rate from bank lenders was very low. Smaller finance company lenders were comparatively more candid than banks in disclosing statistics, but as they appear far less involved in the granting of finance through guarantees, this information was of limited use.
4.5 We also sought assistance with our research from various lenders’ peak bodies. The Australian Bankers’ Association failed to respond to our inquiries. Some assistance, however, was received from the Australian Finance Conference and Credit Union Services Corporation Limited.
4.6 In all, over one hundred lenders were approached for information. Disappointingly, only seven lenders responded to our request for information (while a further two replied that they were unable to assist as they did not use guarantees in their loan practice). It is, perhaps, indicative of a more defensive lending climate in Australia, or greater defensiveness in recent years, or both, that Fehlberg’s small UK study in the early 1990s was supported by a larger number of lenders than our study, and received a dramatically higher response rate.4
4.7 Of the few lenders who participated in our research, most stated that they do not maintain the statistics we sought, nor could they provide estimates in answer to our queries. Given the detailed content of the lenders’ reporting obligations to regulatory bodies such as the Australian Prudential Regulatory Authority, the Reserve Bank of Australia and the Australian Securities and Investments Commission, their inability to provide even estimates is somewhat surprising.
4.8 The following chapter explores the lending and credit environment including lending policy and practice and the regulatory framework in which it takes place. The chapter opens with a brief outline of factors relevant to business finances and debt, the operation of the Code of Banking Practice and industry self-regulation as it relates to guarantees. Once this context is established, we detail the data received in the course of the study which relates to lending practices and the extent of problems with third party guarantees. To augment this information we have also drawn upon non-confidential submissions to the Commission’s Issues Paper Guaranteeing Someone Else’s Debts.5 This includes information received from lenders, and comments from other stakeholders about lenders in relation to the provision and enforcement of third party guarantees and guarantee-like transactions and about what lenders’ obligations should be.
THE REGULATORY ENVIRONMENT
Legislative controls
4.9 The scope of this report does not extend to enquire in detail into the legislative environment – this has been largely covered in the Commission’s Issues Paper, Guaranteeing Someone Else’s Debts.6
4.10 Unfair practices may be challenged under the common law of unconscionability, including the “special” rule for wives revived by the High Court in Garcia in 1998,7 and under statutes such as the Contracts Review Act 1980 (NSW), Fair Trading Act 1987 (NSW) and Trade Practices Act 1974 (Cth).
4.11 We sought information on the impact and effectiveness of these forms of regulation, particularly since changes in the late 1990s. Test cases being pursued by the Australian Competition and Consumer Commission have extended the scope of the unconscionability provisions in the Trade Practices Act 1974 (Cth) (which were extended to cover small business in 1998).8 Whether or not unconscionability has expanded to such a degree that it is inhibiting economic activity is contested. The few credit providers who participated in our survey were generally circumspect, or dismissive, about the impact of the 1998 decision Garcia upon their lending practices.
4.12 The Uniform Consumer Credit Code, in place since 1996, provides for plain language documents, cooling off periods, the provision of warnings and information to prospective guarantors.9 The Consumer Credit Code also provides for disputes in NSW to be resolved through the Consumer, Trading and Tenancy Tribunal, a low cost and relatively accessible forum. However the Consumer Credit Code only regulates the provision of credit where it is provided wholly or predominately for personal, domestic or household purposes.10 The Consumer Credit Code is therefore largely inapplicable to guarantor loans, as the majority of guarantees are given to support small business borrowing.
4.13 With the exception of the Consumer Credit Code, the conduct of the finance industry in taking guarantees is largely governed not by legislation or regulations but by self regulating, voluntary codes of conduct. This is also true of the management of disputes at a pre-litigation stage. So if a guarantee is for business purposes, it is usually only if enforcement is disputed in court that a non-voluntary legal framework is invoked to govern the conduct of the parties and the consequences of their transaction. The framework and limitations of such self regulation are explored below.
Self regulation and codes of conduct
4.14 The policy framework informing consumer protection is clearly marked by a preference for industry or market-based self-regulation. The present Federal Government’s “general presumption is that competitive market forces deliver greater choice and benefits to consumers”;11 and that “government regulation may be inefficient, and, even though it prevents harm to consumers, may create a greater harm, especially lack of profitability for the providers of goods and services.”12 This view assumes that codes and self-regulation will foster best practice, deliver more certainty, be more flexible, less costly and therefore increase consumer protection.13
4.15 A recent UK study has found that the effectiveness of self-regulation of consumer protection should be re-visited after finding that industry development of codes lead to variable standards between the codes, lack of consumer awareness of codes and a general lack of coverage.14 This experience has led one commentator to argue that it would be irresponsible for Australia to abandon consumers and encourage the expansion of self-regulated codes at the expense of government intervention to assist a fair market place.15
4.16 Consumer protection laws and case-law on unfair dealing evidence a range of unfair practices that clearly do require regulation. Many commentators have argued that when industry or business is allowed to regulate itself, self-interest may be the driving force.16
4.17 The finance industry and regulation in Australia, is characterized generally by a tendency towards increasing complexity.17 As a general principle, self-regulation initiatives have the greatest influence in industries with a relatively small number of players who are homogenous in operation and whose interests converge. A recent report noted that these characteristics are inapplicable to the finance and mortgage broker industry.18 Brokers are independent agents who are not directly employed by lenders and work for commissions on transactions. As such brokers are increasingly used, concerns about a heterogeneous and unregulated finance industry are likewise increasing.
Mortgage and loan brokers
4.18 New market entrants are playing an increasingly important role in the rapidly changing and competitive business of credit provision. For example, the rise of broker-originated transactions means that there are not two, but three or more parties to a loan: the borrower, lender, broker and guarantor, each with competing interests. This is of concern for guarantors.
4.19 A recent report by the Consumer Credit Legal Centre has found that brokers are an expanding and largely unregulated aspect of the finance industry.19 The report found that while consumers’ use of brokers has expanded greatly, the mortgage broker industry has few entry barriers such as clear minimum competency or training standards. The report also found that national regulation and state-based laws governing the industry fell short of the regulatory oversight required to protect consumers adequately.
4.20 This report noted that there is particular concern about legal redress available to guarantors who enter into a transaction facilitated by a mortgage broker which is tainted by unconscionability or misrepresentation. Complex considerations of agency may mean that fault cannot be attributed to the credit provider, and unjust contract provisions under the Consumer Credit Code may not be available as the court would have to decide between the competing interests of two “innocent” parties, the third party guarantor and the credit provider.
4.21 The Australian Banking Industry Ombudsman (“ABIO”) has also recently expressed concern about the increase in the use of brokers by banks, including the delegation to brokers by banks of the responsibility of matters such as security documents. The ABIO set out a revised approach to the question of when a bank will be liable as principal for misleading and deceptive conduct of a broker as the bank’s agent. Based on the ABIO’s observations of cases before it, the approach outlines the circumstances when the ABIO would be likely to conclude that the broker is an agent of a bank.20
The Code of Banking Practice
4.22 A major self regulatory mechanism is the Code of Banking Practice (“the Banking Code”). The Banking Code was established in 1993 and exists to set standards of good banking practice.21 The Banking Code is not legislation – only those banks that adopt the Banking Code are subject to its provisions.22
4.23 The Code seeks to regulate both the conduct of loan transactions and also provides dispute resolution mechanisms. In relation to guarantees the Code establishes minimum standards for disclosure and documentation.23 The 1993 Code includes recommendations of legal advice to guarantors24 and provides (with the important proviso of the borrower’s consent) for the provision of information on the loan through its duration to the guarantor.25 The Code also establishes a dispute resolution mechanism for disputed transactions.
4.24 Breaches of the Banking Code are internally investigated according the offending bank’s internal complaints handling system or by reference to the Australian Banking Industry Ombudsman provided it has jurisdiction to deal with such a complaint. Failure to adhere to the Banking Code will be relevant to the way a consumer’s complaint is dealt with by the ABIO (see Chapter 6 for further discussion on the ABIO and dispute resolution).
4.25 Monitoring and compliance with the finance industry codes of practice including the Banking Code are undertaken by the Australian Securities and Investments Commission (“ASIC”).26 Monitoring is based on completion of an annual self-assessment compliance report and dispute statistics by the members of each of the finance system codes.27 Where disputes are not resolved through a bank’s internal dispute resolution process, a consumer can refer a dispute to the ABIO.
4.26 While there has been an overall decrease in the incidence of disputes, in the compliance reporting period from April 2001 to March 2002, disputes about breaches of the Banking Code that were referred to the ABIO increased by 31% since the previous year’s reporting.28 The report also noted that over half of the disputes referred to the ABIO were referred back to the bank by the ABIO for resolution at that level. The report noted some concern that this may suggest that banks’ internal dispute resolution processes are not operating effectively.29 The report also indicates that disputes about guarantees are over three times more likely to be resolved externally by the ABIO than internally by the bank.30
4.27 The Banking Code (1993) faced major limitations. The guarantor provisions did not apply to guarantees given to support the loans of companies or partnerships in which the guarantor had an interest31 – and many if not most guarantee transactions supporting small business were therefore excluded. Given these limitations it is perhaps not surprising that our guarantor respondents reported many practices in the taking of guarantees (discussed in Chapter 5) that did not comply with the Banking Code’s requirements.
4.28 In May 2000, the Australian Bankers’ Association asked Dick Viney, an independent consultant, to conduct a review of the Code of Banking Practice. After widespread industry, consumer and government consultations, an issues paper and final report were released.32 The review received a high number of submissions, many of which commented on the Banking Code’s narrow application, and the poor protections afforded to guarantors. The final report made recommendations to improve consumer protection under the Banking Code and broaden its coverage.
4.29 An amended Banking Code, reflecting many of these concerns, came into force in August 2003. The 2003 Banking Code applies to all guarantees given by an individual to secure loans to another individual, or small business, considerably broadening the scope of coverage of guarantees.33 The amended Banking Code is also more far-reaching in its disclosure provisions. It requires lender’s to give advice that the guarantor can refuse to enter into the guarantee, warnings the there are financial risks involved, advice that the guarantor can request information about the loan during its operation, and a commitment to inform the guarantor of any notice of demand or debt dishonour on the part of the borrower in the past two years.34 Importantly the revised Banking Code also requires that the bank make available to the guarantor a range of information about the borrower’s loan and the financial information upon which the bank made its decision to extend credit. This information must be made available prior to signing, and in the absence of independent legal advice, the bank must allow the guarantor a day to consider the information.35 The provision of this information is no longer subject to the borrower’s consent. The revised Banking Code, if complied with, represents a very significant advance in lender practice. The Banking Code remains voluntary.
4.30 In light of the degree of self-regulation in the finance industry, the remainder of this Chapter focuses upon lender’s internal processes for making and calling upon loans, and goes on to address the question of what lenders believe their responsibilities to guarantors ought to be.
Financier’s lending policies and guidelines
4.31 One of the more contentious areas of lending is the assessment of credit risk for a lender. Credit risk is the potential for loss arising from a debtor failing to meet their repayments.
4.32 Credit risk is generally managed by controls upon individual lending divisions and business managers who are responsible for lending. Lending is carried out within the boundaries of the financier’s lending policies (which cover the approval, documentation and management processes), often set out in manuals. The manuals set out information, guidance and directions to bank staff for the conduct of a bank’s business.
4.33 In the event of litigation, courts may refer to a bank’s manuals and internal lending instructions to address whether a bank has been negligent in a particular case.36 Failure to observe instructions in a manual does not necessarily give rise to legal liability, although it may point to negligence. Much of the case law in this area derives from England.37 The status of bank manuals does not appear to have been looked at in any detail in Australia. Where courts have considered such procedures, the fact that lenders have not adhered to their own guidelines or policies does not appear to have significant influence on the results of litigation.38
4.34 According to the ABIO’s Policies and Procedures, when investigating alleged maladministration in a decision to lend, the ABIO will review, among other things, the decision to lend by reference or adherence to the lenders’ own guidelines. Adherence to these guidelines is an important criterion by which to assess a lender’s actions.
4.35 As part of the research, we sought to access lenders’ manuals, to examine the criteria for seeking third party guarantees, and the process of signing up guarantors. Lenders were mostly unwilling to assist in this regard.39 Two of the lenders provided the research team with guidelines and excerpts of lending manuals in relation to the signing up of guarantors.40 One lender declined to provide extracts from its documented policies and procedures, but assured us that it does provide guarantors all information required by statute or relevant industry codes.
4.36 In the limited material we received we found that the procedures set out were generally concise and clear. Particular emphasis was placed on strictly following these procedures to avoid having transactions reopened by the courts. Emphasis was also placed on making appropriate file annotations.41 These documents confirm the ABIO’s comments that “considerable skill and care has gone into the development of lending guidelines so that staff can properly analyse the risks associated with lending.”42 Belinda Fehlberg noted in her UK study that lender representatives she interviewed, “often emphasized the difficulties in ensuring that practice followed procedure.”43
A guarantee by any other name
“company to be formed as borrower with all four persons as directors so negates any dramas with 3rd parties etc”.44
4.37 A guarantee-like transaction includes one where one of the parties to the loan may receive little or no benefit from the loan and is, in substance if not in form, a guarantor. There appears to be an increasing trend to avoid rules protecting guarantors by restructuring a transaction so that the guarantor becomes the borrower.45 The rise in problematic “guarantee-like” transactions, and fall in traditional third party guarantee transactions was raised by a number of advocates in the course of our initial consultations.46
4.38 This concern was borne out in the research. A number of the litigated cases we reviewed included instances where people were technically the principal debtor in the transaction but were in reality a guarantor for funds advanced to another person.47 This proposition was confirmed by a majority of judges.48 Guarantors also reported that they had jointly borrowed funds – with 8% acting as joint borrowers for business loans and 11% as joint borrowers for personal loans. Two female guarantors reported that they had borrowed funds for the benefit of their bankrupt spouse.
4.39 The distinction between a guarantee and joint loan is important for a number of reasons. First, some of the legislative protections for guarantors are not available to joint debtors.49 Secondly, there is nothing on the face of an advance to joint debtors to put a lender on inquiry that one of the borrowers may be in a position of disadvantage or undue influence in relation to the other. Thirdly, the remedies available to guarantors by application of the principles in Yerkey v Jones and Garcia have not been extended to transactions other than guarantees.50
4.40 The Code of Banking Practice has been amended to reflect the recommendation of the Review of the Code of Banking Practice that a bank ought not accept a person as co-debtor under a credit facility where it is clear on the facts known to the lender, that the person will not receive any direct benefit under the facility.51
LENDER PRACTICE
Small business debt, residential security, and loan defaults
4.41 As part of the research, we sought to investigate how small business was financed. There is surprisingly little data available on how small business is financed in Australia. We sought information directly from lenders to determine how many business loans are guaranteed by mortgages over residential properties, what proportion of guarantees are called upon, and how many of those are disputed.
4.42 However, lenders were not able or were unwilling to provide us with statistics that would enable us to understand fully issues with sourcing small business finance and the extent of third party guarantees to it.52 Some lenders have been conducting their own empirical research on how they are affected by delinquent business loans. For example, analysis undertaken by Westpac in 1998 looked into the severity of loss to the bank in the event of loan default.53 If other lenders had undertaken similar analysis, they were unwilling to disclose it.
4.43 The research team also tried to obtain aggregated data on what proportion of loans are supported by third party guarantees, and of those, what proportion of guarantors were family or friends. Again, the lenders were largely unable or unwilling to provide us with data.
4.44 As an alternative source of information on business finance and debt, we sought assistance from the Australian Prudential Regulation Authority (“APRA”) and the Reserve Bank of Australia (“the RBA”) who are collectively responsible for monitoring Australia’s fiscal stability and setting standards on risk management and reporting within the finance sector.
4.45 As part of its supervisory role, APRA requires lenders to report on their asset quality including reporting on banks’ impaired assets. The test of “impairment” is whether there is a reasonable doubt as to the collectibility of principal and/or interest.54 This information gives at least a general sense on how many loans are being defaulted upon. In its 2001 Annual Report, APRA noted that banks’, building societies’ and credit unions’ impaired assets had begun to rise.55 Unfortunately, APRA has stated that they do not collect data which differentiates business and consumer lending in the process of assessing and collecting reports on prudential standards and impaired assets.
4.46 Reserve Bank of Australia figures note that the weighted average interest paid by small businesses across all types of variable-rate loans has declined recently.56 The Reserve Bank states that this fall is due in part to a shift in small business borrowing to lower-cost products – such as loans secured by housing.57 Our consultations with financial advisors and advocates revealed that many guarantors and co-borrowers are unaware of different options on loans. Guarantors thought that the loan would not be made without a guarantee, and did not understand that in many cases a loan (with a higher interest rate) could be taken out that did not require a guarantee or a joint borrower to support the loan. Taken together, these two sources suggest the possibility that some guarantees are being entered into in order to gain access to cheaper interest rates, rather than as a last resort.
4.47 Data from the ABIO and finance industry code compliance reports from ASIC suggest that the incidents of bad debts being enforced by recourse to a third party guarantee are relatively small. However, statistics from lenders would be useful to confirm this, and get some idea of the breadth of practice and to work out what triggers the requirement for a guarantee. The research team sought to consult directly with banks, building societies and credit unions to confirm that proposition.
What proportion of small business loans require guarantees?
4.48 We were unable to obtain any clear information on the number or proportion of loans that are supported by guarantees.58 Bank lenders said that they could not provide such statistics, though some gave very rough estimates. Smaller lenders, presumably with far fewer resources than the bank lenders were generally able to provide more detailed information than bank lenders. However small lenders were both less likely to undertake commercial lending, and less likely to take guarantees on small business loans.59
4.49 One bank lender said that they do not keep statistics on the proportion of guarantees obtained to support small business loans.60 However, the lender noted that guarantees are “far more common” for business borrowings. The lender suggested that businesses are often undercapitalised and do not have sufficient assets to provide security in their own right, thus guarantees and third party securities are “frequently” obtained. One of the reasons that directors or operators of small businesses provide real property as security is that the costs of finance are considerably lower than finance secured solely over business assets. Another bank lender estimated that 75% of its small business loans are supported by a guarantee,61 but by contrast a smaller bank lender estimated that it requires a guarantee in only approximately 5% of small business loans.62
4.50 Of the smaller lenders who do undertake business finance, most required directors’ guarantees.63 One lender stated that 39% of its small business loans require a guarantee.64
4.51 It has been suggested that the frequency of guarantees in the business context rather than in the consumer context may be due, at least in part, to the fact that the Consumer Credit Code regulates guarantees of consumer loans.65 Likewise, it has been suggested that guarantees are common for business loans because of the prevalence of corporations as the preferred structure for conducting business.66 One lenders’ peak body estimated that in the commercial credit environment, the percentage of required guarantees is in the high 70s.67
What proportion of those guarantees are called upon and disputed?
4.52 We could not obtain sufficient statistics to enable any clear analysis of this issue. A large bank lender said that it does not keep those statistics,68 nor did it provide estimates. Another bank lender estimated 30% of guaranteed small business loans are referred to its problem loan section in any one year. This does not always result in enforcement action. Typically, as many as 50% of those referred loans were refinanced, and a further quarter were discharged following voluntary liquidation of the secured property and 7.5% of secured loans result in the sale of the security. This bank said a “nominal” number of guarantees were disputed – it estimated less than 10 disputed guarantees over a recent twelve month period.69
4.53 Data from the smaller lenders indicate the proportion of their guarantees being called up is very small – in the vicinity of less than 1%, although a higher number become “bad debts” or are issued with letters of demand.70
Risk assessment, business finance and criteria for the use of guarantees
4.54 The Australian Banking Industry Ombudsman writes:
“What appears to be missing is the information that if a person has been asked to give a guarantee it is usually because the bank has concerns about making the loan without security … In other words, the fact that the guarantee is being asked for is usually an indication of insecurity on the part of the bank about the loan.”71
In the course of the research team’s initial consultations it was suggested that guarantors ought to have the right to know what “triggers” the requirement for a guarantee.72 Banks don’t explain why they require a guarantee, which they determine usually after carrying out a credit rating. It was suggested that banks should be explaining the risk of the loan, and why they consider a particular loan so risky as to require a guarantee. One solicitor stated that lenders need to take more responsibility for their lending practices: if they intend to lend to “high risk” clients, then they should accept the fact they will lose out sometimes.73 This criteria could be particularly useful for guarantors to assist them in their decision to become a guarantor.74 One judge who responded to our survey thought that commercial lenders often seek guarantees where it is not necessary.75
4.55 Most of the information provided to us by lenders about risk assessment and lending criteria was of a general nature. One major bank lender refused to “provide precise details of its lending criteria” and did not provide any details of its lending criteria.76 Another major bank stated that it only considers what security the borrower can provide after first considering the borrower’s ability to service the debt.77 In general, where the borrower is a company, directors’ guarantees are required. In these cases a fixed and floating charge may be taken over all the assets of the company,78 or third party security may be taken where “offered”.79 One lender’s general rule is that if they are not prepared to lend to the borrower, then they should not lend based on security offered by a guarantor unless in an “unusual situation” such as a parent assisting their child to buy a car.80
4.56 In the Issues Paper Guaranteeing Someone Else’s Debts, the Commission asked whether the use of third party guarantees moves the emphasis away from effective risk assessment by lenders. A number of lenders submitted that lenders were generally effective in assessing risk, and the availability of third party guarantees does not affect that. St George Bank submitted that they only lend to borrowers able to service their loan themselves, not on the basis of a guarantor’s income, but “on the occasions when we lend to a borrower whose capacity to service the debt relies partially on the cash flow of a personal guarantor, we require the guarantor to obtain independent financial as well as legal advice”.81 The Commonwealth Bank submitted that the borrower’s ability to repay the loan is the “prime criterion, which is not relaxed merely because a guarantee is available”.82 The Australian Finance Conference submitted that assessment of risk “is not a definite science”, but that its members are very effective in assessing risk and any transaction must stand on its merits, regardless of a guarantee.83
4.57 In contrast, the Legal Aid Commission submitted that “the existence of any form of security … can lead lenders to be less rigorous in assessing the capacity of the borrower to repay”.84 The Financial Counsellors’ Association of NSW submitted that “lenders will reduce their lending criteria with the provision of a guarantor”85 which “shifts the onus of responsibility”.86 The Women’s Legal Resource Centre submitted that if, at the time the guarantee is signed, a guarantor is not in a position to meet the debt, “then the risk has been improperly shifted to the guarantor”.87 The Department for Fair Trading submitted that “there is a danger that the use of a guarantee moves the emphasis away from proper assessment of the creditworthiness of a borrower”.88 And the Country Women’s Association suggested that if a lender had some doubt about the viability of the borrower, then the availability of a guarantee may mean the lender “takes a more liberal approach” to the assessment of risk than they would otherwise.89
4.58 Asset based lending, where the borrower and guarantor appear unable on the face of the transaction to be able to repay the loan, is a feature of improvident transactions. Data collected by the project, set out in Chapter 3, indicates that many guarantors are in a vulnerable financial position at the time they provide the guarantee and do not have sufficient income to service the guarantee should they be called upon to do so.
ASSET BASED LENDING
The following are some of the stories collected in the course of the research which clearly indicate asset based lending:
- Mrs F has been on an invalid pension since 1990 with no other income. Her husband is her carer. Mrs F thought she was signing a character reference for her son. In fact, Mrs F was a co-borrower on her son’s mortgage. When her son didn’t make payments the bank sold the son’s property and sought recovery of the difference on the loan from Mrs F. Her son is trying to get a personal loan to make up the difference, as Mrs F is clearly unable to repay the loan.90
- Ms M guaranteed a business loan from NAB to her husband and his partner who ran a small engine repair business. She owned her home in her own name and the guarantee was secured by a mortgage over the home. Although Ms M received legal advice before signing the guarantee, she says the advice was cursory, the solicitor was also her husband’s solicitor, and she did not know that she stood to lose her home. Documents obtained from NAB included a letter from NAB to the business indicating that the business accounts had been in arrears in the past and the loan was necessary to refinance an unsecured overdraft that was in default. Further, NAB’s records revealed that the loan was approved even though the account had regularly been in arrears and the NAB manager had formed the view that the partners were not good business people and did not have the income to finance all commitments. Ms M was told nothing of the financial state of the business. Ms M’s husband was made bankrupt and [the bank] sought possession of the property in the Supreme Court.91
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4.59 In our research we asked the guarantors of business loans whether the lender made enquires about whether or not they would be able to repay the loan if necessary. While 8 responded that the lender did enquire and 5 could not recall, some 28 guarantors responded that such enquiry was not made. Over 70% of respondents to the guarantor survey who supported a business loan gave security in the form of a mortgage over their home.92 Of those who guaranteed business loans for someone else, around a third had to sell the secured family home to pay the debt. In these cases, while the loan may be improvident from the perspective of the guarantor, it is not so improvident for the credit provider who can rely on a mortgaged property in the case of default by the borrower.
4.60 The ABIO has quoted with approval the statement that “No banker should rely on realisation of assets held as security as the primary source of repayment and the banker must be satisfied that there is a clear repayment source”.93 If a loan is approved and the borrower clearly had little or no hope of repaying the loan, then a dispute may raise issues of maladministration.
What kind of security is generally required?
4.61 Lenders stated very generally that the type of security is dependent on the type of loan facility and what security the borrower can provide,94 or that this would depend on the level of security support for the transaction.95
4.62 However, as noted above, data from our guarantor survey indicates a high frequency of guarantor homes and other personal property used as security for business borrowing. Our review of the litigated cases revealed that 88% of the guarantors mortgaged their home to facilitate the loan for someone else; and 94% of the disputed guarantees supported business loans.96
4.63 The use of residential homes as security for business loans is justified by some as an efficient, indeed necessary, use of economic resources.97 For guarantors, however, this entails an enormous loss if the security is called upon. Belinda Fehlberg noted in her interviews with lenders that the mixture of emotional and financial investment in a family home was a factor that they were well aware of and prepared to use to advantage. Fehlberg states that lenders:
“emphasized the importance to them in commercial terms of the surety’s emotional investment in both the relationship with the debtor and the home … In essence private commitments enhanced public enforceability … the family home was described as an important ‘motivational asset’ … particularly to debtors: if a debtor’s home was on the line, he or she would do their best to meet their liabilities to the lender.”98
BETTER PRACTICE
What obligations, if any, should a lender owe a guarantor in a close relationship with the borrower?
4.64 Some of the submissions to the Commission’s Issues Paper indicated that a threshold difficulty for lenders is the identification of those in a close personal relationship with the borrower.99 One lender suggested that depending on the complexity and amount of the loan, a lender may make independent legal advice a precondition of providing finance.100 The Australian Finance Conference states that a guarantor in a close personal relationship with a borrower “needs to have time to consider or reflect on their position as guarantor and to make an assessment ... away from the pressures of the relationship”.101 The Legal Aid Commission suggested that rather than imposing a burden on a lender to question the nature of the relationship between the borrower and guarantor, the better approach would be to recognise that guarantees, as a class of contract, are peculiarly susceptible to being entered into in unjust circumstances, and that lenders should approach all guarantees on this basis.102
4.65 None of the lenders who sent submissions to the Commission referred to any policy or guidelines in relation to obligations owed to guarantors in close personal relationships with borrowers. It has been suggested, given the changes in the common law over the past few years, that some banks may need to consider their current procedures and how they classify and handle “high risk” and “low risk” transactions at a policy level.103
4.66 St George Bank said a lender’s obligations should be limited to taking reasonable steps to ensure the guarantor understands the effect of the guarantee which may include a recommendation the guarantor obtain independent legal advice, plain English and legible documentation and allowing the guarantor reasonable time to read the documents. It did not think there should be any special rule for guarantors in close personal relationships with the borrower: but did concede that it is more difficult for a lender to satisfy it has discharged its duty in explaining documents to certain guarantors, such as a non-English speaking guarantor.104
4.67 The Commonwealth Bank’s general approach was to refer a guarantor in a close personal relationship with the borrower to independent legal advice and, if appropriate, financial advice. It did, however, caution that a lender may not be aware of any close personal relationship, and there may be situations where making such an inquiry would perturb the borrower. A lender, it said, may make it a precondition of providing finance that a guarantor obtain legal advice, depending on the complexity and amount of the loan.105 The role of independent legal advice is discussed further in Chapter 5.
What should a reasonable lender do?
4.68 The New South Wales Law Reform Commission asked for submissions about what information a lender should be required to disclose to a prospective guarantor in relation to the primary borrower before they sign the guarantee.106
4.69 Submissions opposing change to lenders’ currently limited common law duty to guarantors were received from lenders or lenders’ associations and included the following reasons:107
- it would increase in the cost of transactions – the borrower’s costs will increase because the lender’s costs will increase;
- most guarantees are entered by directors of the borrower company and these directors are already in a position to understand the financial position of the borrower;
- such a requirement would be of dubious benefit to the majority of guarantors and administratively onerous for lenders;
- for some simpler transactions lenders might be required to explain credit scoring systems, which may not be easily understood by prospective guarantors;
- there will be an increased risk that guarantors will avoid the contract on the grounds that the lender failed to disclose all relevant information (unless the disclosure requirements are tightly limited);
- lending approvals will reduce because of the increased risk that guarantors may avoid the contract;
- guarantors may rely too much on the information provided by the lender, rather than making their own assessment of such matters as the borrower’s honesty;
- lenders might become liable for financial loss suffered by a prospective borrower as the result of mistaken advice provided to a prospective guarantor.
4.70 The general flavour of lenders’ submissions was that more information would only cost more, would be otiose for some company transactions and could expose the lender to more risk where the information is either insufficient, incorrect, misunderstood or poorly interpreted.
4.71 Most non-lender submissions supported providing guarantors with all the information necessary to assist making the decision whether to guarantee the loan.108 Similar issues were discussed in the review of the Code of Banking Practice.109
4.72 While the most recent High Court decision on guarantees, Garcia, provided confirmation of the legal principles concerning guarantees entered into by wives, it did not offer much practical guidance on what lenders, and solicitors, should do to ensure that a guarantee is enforceable.110 By contrast, the House of Lords decision in the 2001 case of Etridge contains clear instructions on practical procedural matters in relation to advising and signing up a guarantor, specifically when a wife guarantees a loan for her husband or his business.111 This duty is balanced between lenders and lawyers, but nonetheless is presented as a directive. First, the lender must communicate directly with the wife; and secondly, the lender must disclose relevant financial information. There is also a third procedure to be adopted in the exceptional event where the lender believes or suspects that the wife has been misled or her signature was obtained by undue influence. The result of Etridge means those in the business of lending must revise their procedures for obtaining security from a debtor’s family or friends.
4.73 A significant issue for guarantors was the availability (or lack thereof) of information about the loan they have guaranteed. In Etridge, the House of Lords directed that lenders should be obliged, as routine practice, to disclose certain documents to the solicitor advising the wife about signing the guarantee. In Etridge, these documents include: information on the purpose for which the new facility is requested; the current amount of the husband’s indebtedness; the amount of the husband’s current overdraft facility and a copy of the written application for which the current guarantee is required. In order to disclose this information to the guarantor, the husband’s consent is required. If the consent is not given, then the transaction cannot proceed. This procedure requires operational changes to lenders’ practice.112
4.74 The Final Report on the Review of the Code of Banking Practice adopted a similar approach to Etridge. The recommendations advocate full lender disclosure of all information to the guarantor, including any relevant financial details about the debtor and the transaction being guaranteed. This disclosure is required if such facts are in the possession of the bank and a reasonable prospective guarantor would reasonably require them in order to decide whether or not to enter the guarantee.113
4.75 The Australian Banker’s Association accepted most of the recommendations made in the Final Report concerning guarantees. Disclosure provisions under the amended Banking Code have been significantly expanded.114 The ABIO has expressed the view that as a result of the broader disclosure obligations there will be a decline in complaints it receives in relation to disputed guarantees.115 The new Banking Code is effective from August 2003. At least one bank expressed concern that the new disclosure rules represent a problem for banks in that they may find it difficult to obtain all the material the far-reaching provisions require. Even prior to the amended Banking Code coming into effect, there was talk of a transitional period allowing banks to remain compliant despite not disclosing material.116
4.76 It is important to keep in mind that while “informational disparity”117 between a guarantor and the borrower or lender is often a significant issue, lack of information about the true financial position of the borrower is not necessarily determinative of the reason why a guarantor would enter into an improvident guarantee transaction. The empirical research in Chapters 2 and 3 including analysis of the reasons why guarantors enter into these kinds of transactions, demonstrates that more or better information will not necessarily solve problematic guarantee transactions.
CONCLUSION
4.77 While there is a wide range of common law and legislative avenues available to challenge unjust transactions after the event, there is relatively little external regulation of the conduct of the finance industry in taking guarantees. The Consumer Credit Code provides a range of protections for borrowers, but it is limited in its application to “consumer” transactions. Most guarantees are given to support small business borrowing and so are not currently covered by the Consumer Credit Code.
4.78 The finance industry’s conduct in taking guarantees is therefore largely self-regulated. The Code of Banking Practice is the main self-regulation mechanism. However, this Code only applies to banks that adopt it. While the Code was originally limited to consumer guarantees, following a comprehensive review, guarantees of small business loans are included in the scheme from August 2003. The revised Code of Banking Practice contains far more wide-reaching constraints on the taking of guarantees than have existed to date.
4.79 We were unable to ascertain the number or proportion of guarantees that are called upon in any given period, or that result in the repossession of security such as residential homes, as lenders were unable or unwilling to disclose this information. Nor could we discover the number or proportion of debts which are disputed by guarantors. More data from lenders would have greatly assisted our quantitative assessment of problematic third party guarantees. It would also have been useful if lenders could have better participated in the debate which will inevitably inform reform initiatives in the area.
4.80 The criteria which trigger the need for a third party guarantee are unclear, and do not appear to be transparent. If a guarantee is required, it seems that it is usually because the lender has doubts about the viability of the enterprise or the capacity of the borrower to repay. Yet these criteria are not made apparent to the guarantor. There was some evidence suggestive of the fact that some lenders had engaged in asset based lending, where they assess the risk of the loan by reference of the value of the security rather than on the ability of either the borrower or the guarantor to repay the loan.
4.81 Lenders were generally opposed to any extension of responsibility in providing greater information or explanation of transactions to guarantors, including providing information on the reason for requiring a guarantee.
4.82 The experiences of guarantors at the point of executing the guarantee contract are explored in the next chapter.
FOOTNOTES
1. Barrister Survey, Question 29, Respondent 1.
2. Of the problematic securities given, Fehlberg notes 18 were to major banks, 2 to minor banks and 1 to an insurance company: Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 156. Fehlberg’s interviews with lenders also revealed that banks were far more likely to be involved in guarantees than building societies: at 203.
3. 63% of guarantors reported that the loan was made by a bank, only 1% from a credit union and 23% from other finance institutions. In the “other” category, three guarantors reported that the loan was from their solicitor.
4. Fehlberg contacted 20 lenders and was assisted by 9: see Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 94. Our initial attempts even to identify the appropriate contact person at the banks’ offices was surprisingly difficult and went no way to dispel the impression of a culture of secrecy. When one major bank was approached and asked for contact details to send a survey, the researcher was told: “the bank policy is to not participate in research”; a receptionist at another major bank flatly refused even to connect the researcher’s telephone call to the legal department.
5. New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000). Non-confidential submissions are identified by lender, while confidential submissions are referred to as “Bank A”, “Lender H” etc.
6. See New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000), Chapter 2.
7. Garcia v National Australia Bank (1998) 194 CLR 395 reviving Yerkey v Jones (1940) 63 CLR 649.
8. For application of statutory unconscionability, pursuant to the Trade Practices Act 1974 (Cth) in the finance sector, see: ACCC v CG Berbatis Holdings Pty Ltd [2000] FCA 1376; ACCC v CG Berbatis [2003] HCA 18 and ACCC v No-Knead (Franchising) Pty Ltd [2000] FCA 1365; ACCC v Leelee Pty Ltd [1999] FCA 1121. See Bryan Horrigan, “Unconscionability breaks new ground – avoiding and litigating unfair client conduct after ACCC test cases and financial services reform” (2002) 7 Deakin Law Review 73.
9. Consumer Credit (New South Wales) Code and Regulations 1995 (NSW).
10. Consumer Credit (New South Wales) Code and Regulations 1995 (NSW) s 6.
11. Minister for Consumer Affairs, “Foreword” in Department of Industry, Science and Tourism 1998, Codes of Conduct – Policy Framework at 3.
12. John Goldring, Laurence Maher, Jill McKeough and Gail Pearson, Consumer Protection Law (Federation Press, 1998) at 13.
13. Ministerial Council on Consumer Affairs, Fair Trading Codes of Conduct – Why Have Them, How to Prepare Them (AGPS, 1996) at 1.
14. See United Kingdom Office of Fair Trading, Raising Standards of Consumer Care: Progressing Beyond Codes of Practice (1998).
15. Chris Field, “The New Face of Consumer Protection” (1999) 24 Alternative Law Journal 157 at 159.
16. See Chris Field, “The New Face of Consumer Protection” (1999) 24 Alternative Law Journal 157 at 158; and John Goldring, Laurence Maher, Jill McKeough and Gail Pearson, Consumer Protection Law (Federation Press, 1998) at 13.
17. Tyrone Carlin and Guy Ford, “Editorial” (2002) 1 Journal of Law and Financial Management 5.
18. Consumer Credit Legal Centre (NSW) Inc, A Report to ASIC on the Finance and Mortgage Broker Industry (2003) at 45.
19. See, Consumer Credit Legal Centre (NSW) Inc, A Report to ASIC on the Finance and Mortgage Broker Industry (2003).
20. Australian Banking Industry Ombudsman, Bulletin No 36, December 2002.
21. See also Building Society Code of Practice (1994) and Credit Union Code of Practice (1994). Both of these Codes are modelled upon the Code of Banking Practice. Copies are available on the Australian Securities and Investments Commission website: http://www.asic.gov.au.
22. Banks that have adopted the Code as at August 2002 are: Adelaide Bank Limited, AMP Bank Limited, Arab Bank (Australia) Limited, Australia and New Zealand Banking Group Limited, Bank of China, Bank of Western Australia Ltd (Bankwest), Bank of Queensland Limited, Bendigo Bank Limited, Citibank Limited, Colonial State Bank, Commonwealth Bank of Australia, HSBC Bank Australia Limited, ING Mercantile Mutual Bank (Australia) Ltd, Macquarie Bank Limited, National Australia Bank Limited, Primary Industry Bank of Australia Limited, St. George Bank Limited, Suncorp-Metway Limited, Westpac Banking Corporation.
23. Code of Banking Practice (1993). This code is available at http://www.bankers.asn.au. Clause 17 regulates the provision of guarantees:
“17.2 A Bank may only accept a guarantee if the amount of the guarantor’s liability is limited to, or is in respect of, a specific amount plus other liabilities (such as interest and recovery costs) that are described in the guarantee.
17.3 Before accepting a guarantee a Bank shall inform a prospective guarantor that the documents specified in section 17.4(ii) and 17.6 will be provided to the prospective guarantor if the borrower consents. If the borrower does not consent, the Bank shall so inform the prospective guarantor and shall not accept the guarantee without the agreement of the prospective guarantor to proceed with the guarantee in the absence of such consent.
17.4 A Bank shall provide to a prospective guarantor:
(i) a written warning about the possibility of the prospective guarantor becoming liable instead of, or as well as, the borrower; and
(ii) subject to obtaining the consent of the affected borrower, a copy or summary of the contract evidencing the obligations to be guaranteed.”
24. “17.5 A Bank shall recommend that a prospective guarantor obtain independent legal advice.”
25. “17.6 Subject to obtaining the consent of the affected borrower, a Bank shall send to a guarantor:
(i) a copy of any formal demand that is sent to the borrower; and
(ii) on request by the guarantor, a copy of the latest relevant statements of account provided to the borrower, if any.”
26. ASIC inherited responsibility for monitoring the codes from the Australian Payments System Council in July 1998.
27. According to ASIC, as a result of the recent review of the Code of Banking Practice, responsibility for monitoring that Code is likely to move to a new body once the revised code is in effect.
28. Australian Securities and Investments Commission, Compliance with the Payments System Codes of Practice and the EFT Code of Conduct: April 2001 to March 2002 (2003) at 26.
29. Australian Securities and Investments Commission, Compliance with the Payments System Codes of Practice and the EFT Code of Conduct: April 2001 to March 2002 (2003) at 26.
30. Australian Securities and Investments Commission, Compliance with the Payments System Codes of Practice and the EFT Code of Conduct: April 2001 to March 2002 (2003) at 25, 27.
31. “17.1 This section shall apply to each guarantee and each indemnity (whether or not contained in a security) (called “guarantee” in this section 17) obtained from a third party who is an individual (called “the guarantor” in this section 17) for the purpose of securing any financial accommodation or facility provided by a Bank to any person (called “the borrower” in this section 17) other than:
(i) a public corporation or any of its Related Entities;
(ii) a corporation of which the guarantor is a director, secretary or member or any of its Related Entities;
(iii) a trustee of a trust (including a discretionary trust) of which the guarantor or a corporation or a Related Entity that is referred to in paragraph (ii) is a beneficiary or one of a class of beneficiaries under the trust; and
(iv) a partner, co-owner, agent, consultant or associate of any of the guarantor, a corporation or Related Entity referred to in paragraph (ii) or a trustee referred to in paragraph (iii);
at the time the guarantee is obtained. The term “public corporation” has the meaning set out in section 9 of the Corporations Law.”
32. Dick Viney, Review of the Code of Banking Practice, Issues Paper (2001); Dick Viney, Review of the Code of Banking Practice, Final Report (2001).
33. Code of Banking Practice (2003). A “small business” under the amended Code means a business employing less than 100 full time (or equivalent) employees if the business is or includes the manufacture or goods; or in any other case, less than 20 full time (or equivalent) employees: cl 40.
34. Code of Banking Practice (2003) Cl 28.4.
35. Code of Banking Practice (2003) Cl 28.5.
36. See Wickrema Weerasooria, “25 years of banking litigation (1972-1997) and emerging issues in retail banking in Australia” (1998) 13 Australian Banking Law Bulletin 2 at 15 (Supplement).
37. See Wickrema Weerasooria, Banking Law and the Financial System in Australia (5th ed, Butterworths, 2000) at 343–348.
38. See eg State Bank of NSW v Watt [2002] ACTSC 74. The lender’s own procedures for informing mortgagors/guarantors were not followed as the documents were not signed in the presence of a bank officer or solicitor as the bank’s internal procedures required. The son obtained his parents’ signature on refinancing documents while they were holidaying in Sweden. Gray J held that “nothing adverse” could be drawn from this, at para 50. In Mitchell v 700 Young St Pty Ltd [2003] VSCA 42, the Victorian Court of Appeal noted that the lender failed to follow its own guidelines in that it never dealt directly with the elderly guarantor but communicated with her son and allowed him to deliver to her the security documents for execution, but nothing turned on that point. However, in the recent case of St George Bank v Trimarchi [2003] NSWSC 151, Dunford J found it significant, when granting relief for an unjust contract under the Contracts Review Act 1980 (NSW), that the bank had failed to follow its own policies, at para 95.
39. One confidential submission from a former bank manager of a large bank confirmed that banks are extremely reticent to pass on information from their bank manuals. He suggested that the only way banks will disclose such documents is through the coercive discovery process in litigation: Confidential Submission, September 2000.
40. Bank A, Submission 17 September 2001.
41. Bank B, Submission 6 August 2002.
42. Australian Banking Industry Ombudsman, Policies and Procedures Manual at 25.
43. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 202.
44. Fax from finance broker to lender concerning two elderly mothers who were to put up their homes as security for a loan made to a company owned and controlled by their respective children: Challenger Management Investment Ltd v Davey [2002] NSWSC 430, exhibits 3 and 7 in the trial.
45. Report of the Expert Group on Family Financial Vulnerability, Good Relations, High Risks – Financial Transactions within Families and Between Friends (Report, 1996) at 7.
46. Narelle Brown, Financial Counselling Association of New South Wales, Consultation July 2000.
47. Pasternacki v Correy [2001] ANZ ConvR 240; McAuley v Panagiotis (No 2) (1998) 200 LSJS 205; Ribchenkov v Suncorp Metway (2000) 175 ALR 650; Sapuppo v Ribchenkov [2002] ANZ ConvR 164.
48. Judge Survey, Question 6(a).
49. In its submission to the New South Wales Law Reform Commission’s Issue Paper, one financial counselling service raised concerns that joint borrowing may be used as an alternative to more strictly regulated guarantees: Ryde-Eastwood Financial Counselling, Submission at 8-9.
50. Elkofairi v Permanent Trustee Co Ltd (2003) Aust Contract R 90-157; [2002] NSWCA 413.
51. See Dick Viney, Review of the Code of Banking Practice, Final Report (2001) at 63-64; Code of Banking Practice (2003) cl 26.1.
52. One bank lender who named themselves as “the worst offender” stated that they “were not inclined to respond” to our request for statistics: Bank X, Telephone Consultation 3 May 2002.
53. Robert Eales and Edmund Bosworth, “Severity of Loss in the Event of Default in Small Business and Larger Consumer Loans” (1998) 80 Journal of Lending and Credit Risk Management 58.
54. A bank’s impaired assets represent the aggregate of its restructured and non-accrual exposure, plus any assets acquired through enforcement of security. Building societies and credit unions report their impaired assets as loans in arrears or overdrawn accounts. See Australian Prudential Regulation Authority, Guidance Note AGN 220.1, Impaired Asset Definitions, November 2002.
55. Australian Prudential Regulation Authority, Annual Report 2002, “Supervision” at 8-9. The 2002 Annual Report did not report on impaired assets, but it did refer to lenders who significantly increased their exposure to commercial lending. Some lenders were requested to curtail their lending activity until adequate credit policies and assessment criteria were put into place: Australian Prudential Regulation Authority, Annual Report 2002 at 22.
56. See Reserve Bank of Australia Bulletin, February 2002 at 60.
57. See Reserve Bank of Australia Bulletin, February 2002 at 60; refer also Reserve Bank Statistics, Statistical Tables D7: Bank Lending to Business (as at 7/4/03) http://www.rba.gov.au/Statistics/Bulletin/index.html. The RBA defines small business loans by reference to the size of the loan (that is, a loan of $500,000 or less). On the basis of loans of this size which are loaned at particular interest rates, the RBA infers that these loans are residentially secured loans. According to the RBA, the trend to residentially secured products is also evident from changes in the weighted average interest rate paid on variable rate loans by small businesses.
58. Fehlberg likewise notes the absence of even basic statistics on the incidence of third party guarantees in the UK: Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 91.
59. Taking of guarantees is not a large part of credit union practice as they are not generally involved in commercial lending. In the past is was estimated that guarantees were required for less than 10% of all loans, and it is suspected that it is even less now. Credit Union Services Corporation Limited, Telephone Consultation 21 July 2001.
60. Bank A, Submission 17 September 2001.
61. Bank B, Submission 6 August 2002.
62. Bank C, Submission 30 May 2002.
63. Lender D, Submission 7 September 2001, Lender G, Submission 28 September 2001.
64. Lender F, Submission 8 October 2001.
65. Australian Finance Conference, Submission at 2.
66. Australian Finance Conference, Submission at 2.
67. Australian Credit Forum, Submission at 2.
68. Bank A, Submission 17 September 2001.
69. Bank B, Submission 6 August 2002. Similarly, Bank C estimated less than 5% of loans are called upon; and that although statistics of disputed guarantees are not maintained, they were able to say “very few” are disputed: Bank C, Submission 30 May 2002.
70. Lender D stated that “very few, less than 1%” of its business loan guarantees are called up: Submission 7 September 2001 at 1. Lender E does not provide business finance: Lender E, Submission 24 August 2001 at 1; Lender F approximates 3% of its business loans with guarantees become bad debts, but was unable to state the percentage of guarantees that were called up, but that it would be “very small”: Lender F, Submission 8 October 2001 at 1. Lender G reported that in less than 1% of cases a guarantee is called upon: Lender G, Submission 28 September 2001 at 1. Lender H estimates it issues letters of demand against a guarantor in 5% of cases, but issues proceedings against a guarantor in less than 0.5% of all contracts: Lender H, Submission 5 October 2001.
71. Colin Neave, Australian Banking Industry Ombudsman, paper presented at the Australian Finance Conference (2000) at 14.
72. Conrad Grey, Legal Aid Commission, Consultation July 2000.
73. Solicitor Survey, Comments, Respondent 71.
74. Conrad Grey, Legal Aid Commission; Ben Slade, Solicitor, Consultations July 2000.
75. Judge Survey, Respondent 1.
76. Bank B, Submission 6 August 2002.
77. Bank A, Submission 17 September 2001.
78. Bank A, Submission 17 September 2001.
79. Bank C, Submission 30 May 2002.
80. Lender D, Submission 7 September 2001 at 2.
81. St George Bank, Submission at 2.
82. Commonwealth Bank, Submission at 4.
83. Australian Finance Conference, Submission at 7-8.
84. Legal Aid Commission, Submission at 8.
85. Financial Counsellors’ Association of NSW, Submission at 1.
86. Financial Counsellors’ Association of NSW, Submission at 1.
87. Women’s Legal Resource Centre, Submission at 2.
88. Department for Fair Trading, Submission at 3.
89. Country Women’s Association, Submission at 2.
90. Guarantor Survey, Respondent 71.
91. Legal Aid Commission, Submission.
92. 51% of guarantors to a business loan gave a mortgage over their home, 18% stated that they gave a personal guarantee while 20% stated that they gave both, 11% gave other security or took out the loan in their own name.
93. ABIO, “Maladministration in the Decision to Lend” Policies and Procedures Manual at 24.
94. Bank A, Submission 17 September 2001.
95. Bank C, Submission 30 May 2002.
96. Case Law Review, Issues 12 and 10.
97. See eg Robin Baxedale, “Garcia v National Australia Bank Limited – Ensuring Equity in Surety Transactions: A Legal Debt End?” (1999) 21 Sydney Law Review 313.
98. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 204.
99. The NSW Minister for Fair Trading submitted that requiring a lender to inquire into the relationship between the borrower and guarantor would be “onerous and clumsy”, Submission at 5; see also Australian Finance Conference, Submission at 20; Commonwealth Bank, Submission at 13.
100. Commonwealth Bank, Submission at 13.
101. Australian Finance Conference, Submission at 21.
102. Legal Aid Commission, Submission at 3.
103. Bryan Horrigan, “Unconscionability Breaks New Ground – Avoiding and Litigating Unfair Client Conduct After ACCC Test Cases and Financial Services Reform” (2002) 7 Deakin Law Review 73 at 91. Horrigan also suggests that the extension of unconscionability criteria under the Trade Practices Act 1974 (Cth) opens the way for more judicial review of banking conduct in both consumer and business transactions.
104. St George Bank, Submission at 5.
105. Commonwealth Bank, Submission at 13.
106. New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000) at 102.
107. St George Bank, Submission; Australian Finance Conference, Submission; Commonwealth Bank, Submission.
108. NSW Legal Aid Commission, Submission at 13; Women Lawyers’ Association of NSW, Submission at 3; Women’s Legal Resources Centre, Submission at 6; NSW Young Lawyers, Submission at 3; Financial Counsellors’ Association of NSW, Submission at 3; University of Western Sydney, Centre for Elder Law, Submission at 17; Ryde-Eastwood Financial Counselling Service, Submission at 4.
109. Dick Viney, Review of the Code of Banking Practice, Issues Paper (2001) at 88-98; Dick Viney, Review of the Code of Banking Practice, Final Report (2001) at 56-61.
110. Janine Pascoe, “Wives, Lenders and Guarantees: New Law in the UK and Lessons for Australia” (2002) 17 Australian Banking and Finance Law Bulletin 117 at 123.
111. Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773, per Lord Nicholls at para 79.
112. Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773 at para 50 and 80.
113. See Code of Banking Practice (2003) at cl 28.4.
114. Code of Banking Practice (2003) at cl 28.4.
115. Australian Banking Industry Ombudsman, Telephone Consultation 11 March 2003.
116. Francis Wilkins, “Cracking the Code” Lawyers Weekly (7 March 2003) at 18.
117. Janine Pascoe, “Wives, Lenders and Guarantees: New Law in the UK and Lessons for Australia” (2002) 17 Australian Banking and Finance Law Bulletin 117 at 124.
