Mortgage Brokers - What
duty of care do they owe to residential property investors?
Mortgage Brokers / Finance Brokers are not often targets
in loan enforcement proceedings.
The fact that the mortgage broker, not the lender, was
targeted by experienced property investors facing
repossession proceedings makes the decisions of the Court of
Appeal of the Supreme Court of New South Wales in Carnemolla
v Adelaide Bank  NSWCA 122 (McColl JA, Barrett JA,
Tobias AJA), and of the single judge in Bendigo & Adelaide
Bank Ltd v Carnemolla  NSWSC 1202 (Hislop J) stand
The loan in question was made before the National Credit Law
came into effect.
The court applied a common law duty of care to the mortgage
broker, which is similar to the not unsuitable loan
requirement and to the responsible lending conduct obligations under the National Credit Law.
Why was the mortgage broker pursued in Carnemolla?
The property investors, Sebastian and Lucia Carnemolla,
consulted a mortgage broker in November 2004 to refinance a
loan. The loan was secured against their residential
investment properties and their family home. The investment
properties had been purchased for a residential property
As the loan was predominantly for investment purposes, it
fell outside of the former UCCC (Uniform Consumer Credit
In defending possession proceedings brought by the lender
against the family home, the Carnemollas joined the mortgage
broker and claimed that he should bear responsibility for
the loan default. They alleged -
- They were taken advantage of because of their difficult
- They were influenced by having a close relationship with the
- The new mortgage was not in their best interests.
- They needed to obtain legal advice when signing the loan
- The loan application contained false information and their
signatures were forged.
- The taxation returns used were false.
- They were disadvantaged through lack of education, reasoning
ability and financial know-how.
- One of them had a psychiatric condition.
These allegations were questions of fact decided by the
single judge. He found in favour of the mortgage broker on
each, substantially on credit, after hearing oral testimony.
There was a clear lack of what today would be preliminary
The Court found that the Carnemollas were experienced
property investors – they had experience in the purchase and
financing of real estate, they understood the nature of a
loan application and a loan contract, and they understood
that if they defaulted the lender could take possession of
the property security and sell it. And that the loan was in
their best interests.
The National Credit Law – the loan must be not unsuitable
The current law on the duty of care owed by mortgage brokers
for residential investment loans is found in the Responsible
Lending Provisions – Chapter 3 of the National Consumer
Credit Protection (NCCP) Act 2009. The law took effect on 1
The National Credit Law applies to mortgage brokers who
arrange residential property investment loans, mortgages and
guarantees by natural persons.
The National Credit Law follows the common law as described
in the Court of Appeal in Carnemolla in two respects:
- Mortgage brokers (being persons who provide credit
assistance), must arrange not unsuitable loans or principal
increases (Part 3.1).
The not unsuitable loan requirement appears to be broadly
equivalent to the standard of care that the Court applied in
Carnemolla – that the loan [must be] in the best interests
of the borrower.
In Carnemolla, the Court found that the loan refinancing was
in the best interests of the borrowers because -
The refinancing the loan ... so as to obtain additional
funds after the repayment of the existing loan ... was a
legitimate business decision provided the excess was
sufficient to enable the mortgage to be paid for a
reasonable period in which ... to sell ... [the property
- Mortgage brokers must make a preliminary assessment
whether the credit contract is not unsuitable for the
borrower. To do so, they must –
- make reasonable enquiries about the borrower’s requirements
- make reasonable enquiries about the borrower’s financial
- take reasonable steps to verify that financial situation
The enquiries and steps the mortgage broker must take echo
the issues raised in Carnemolla.
The preliminary assessment must be prepared and made
available to the borrower (if requested). Had this written
assessment been prepared and been made available, it would
have provided stronger evidence in Carnemolla that the
mortgage broker had satisfied their duty of care.
While the National Credit Law applies only to property
investors who borrow (or refinance) or provide property
security as natural persons (in their personal names), for
residential property investment, renovation or improvement,
the general principles the Court has laid down in Carnemolla,
could have wider application.
The wider application is that the principles could apply to
property investors who personally guarantee residential
investment loans to their investment entities such as family
trusts or SMSFs, and therefore might expose their family
home which is in their personal name.
The National Credit Law - responsible lending conduct
The National Credit Law applies to property investment loans
obtained for the purpose of purchasing or refinancing or
improving residential property for investment purposes.
According to the guidance in the National Credit Law, the
credit will be unsuitable if –
- the borrower could not pay or could only pay with
substantial hardship, such as if the sale of the borrower’s
principal place of residence is the only means of repayment;
- the loan will not meet the borrower’s objectives; or
- the borrower is in default under an SACC (small amount
The National Credit Law requires care to be taken as to
unsuitability when offering loans which are not standard
home loans. A standard home loan is defined as a loan where
principal and interest is paid for the full term, and the
interest rate is either variable or fixed on the entire
balance. The duty of care is higher if the investment loan
does not follow the standard home loan definition. For
example, it is higher if interest is capitalised to allow
time to sell because this reflects poorly on the borrower’s
ability to make regular payments.
ASIC Regulatory Guide 209 sets out ASIC’s expectations for
meeting the responsible lending obligations in Chapter 3 of
the NCCP Act.
RG 209 provides examples of the types of information that a
mortgage broker should use to verify a consumer’s financial
situation, such as: PAYG employees – recent pay slips and
employment confirmation; Self- employed – financial
statements, business bank account statements, recent
taxation returns, an accountant’s statement, BAS records;
All – a credit report and credit information.
The Carnemolla decision serves as a wake-up call to mortgage
brokers who arrange residential investment loans which do
not fall under the National Credit Law.
With non-National Credit Law lending, Mortgage brokers /
Finance brokers owe a common law duty of care to property
investors to arrange loans which are in the best interests
of the property investor.
The documentation used should be of a similar standard to
the preliminary assessment.
Some residential investment loans are hybrid in terms of the
National Credit Law. A residential investment loan which is
made to a family trust or SMSF with a corporate trustee does
not fall under the National Credit Law. But if the family
home is in the name of a natural person and is mortgaged,
then that part of the loan falls under the National Credit
Therefore, many mortgage brokers adopt the practice of
treating all residential investment loans as falling under
the National Credit Law, and apply responsible lending
Footnote: The Australian Treasury’s proposals to widen the
application of the National Credit Law to a wide range of
investment credit contracts, has been deferred until the
post 7 September 2013 parliament.
This article was first published by Cordato Partners in
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