Broker-originated guarantor loans have been placed under the spotlight during the third round of public hearings of the financial services royal commission.
Appearing before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry on Monday (20 May), Legal Aid NSW solicitor Dana Beiglari recalled cases in which she observed that clients, usually older Australians, were signed up as guarantors for business loan without full knowledge of the implications.
“Very often it’s because their child has done most of the logistics, and sorted out the paperwork with the bank, or in some cases with the broker,” the senior solicitor said.
“I’ve seen some cases where a broker has been involved as well as a bank, and in those cases, my client very often can’t describe the circumstances of signing up to the guarantee, beyond going to the bank.
“In fact, I’ve had cases before where clients think they’re a guarantor but in fact they’re a co-borrower, which comes with a different set of obligations on their part.”
Ms Beiglari went on to say that in some cases, she had seen disputes such as these go to court. She explained: "Say it’s complex legally, or there are a number of other parties that might be involved, such as the third party beneficiary. So the son or daughter, or a broker. And in those cases, it’s more appropriate to go to court.
"But court has difficulties – some difficulties, including that it can be a stressful place for people to resolve their legal disputes. It can be expensive, time consuming, and legally complex," she said.
The lawyer made the comments while giving evidence to the commission regarding a direct-channel guarantor loan, involving disabled pensioner Carolyn Flanagan.
Ms Flanagan sought legal advice from Ms Beiglari after being told by Westpac that her home would be sold to recoup losses incurred by the bank after her daughter failed to repay a business loan in which she was signed to as a guarantor.
Ms Flanagan, who suffers from several medical conditions, also appeared before the commission via a video link.
Ms Flanagan told the commission that she was not fully aware of the risks associated with the loan when she signed on as a guarantor and could not fully recall the processes involved in the loan application.
Loan contracts “too difficult” to understand
The royal commission also dissected the ABA’s banking code of practice during the first day of its third round of hearings.
Witness Philip Khoury, who reviewed the code for the ABA, told the commission that one of the issues he raised with the banks was around the simplification of loan contracts to small businesses.
Mr Khoury said that small business owners he had consulted described the code as “impenetrable” and “far to difficult to understand the impact of each of the clauses”.
Mr Khoury explained that as part of the unfair contracts legislation being introduced at the time, the banks assured him that they were redrafting their standard small business loan contracts and that they would “come out much simpler and easier to understand, which we took them at their word for”.
The redrafted loan contracts now include a summary of the “critical dimensions of the loan” played out in “simple language”, which Mr Khoury said “is a step in the right direction”.
The royal commission’s third round of hearings continues this week with case studies from ANZ, Bank of Queensland, CBA, Westpac and Suncorp Bank.
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