Bransgroves Lawyers have observed, over many years, that the practice of placing caveats on the title for the recovery of fees where the loan does not proceed can be unfair to the borrower and result in reputational damage for the lender or broker if unreasonable. We have therefore developed this policy to address where we think the line is crossed from reasonable and useful into unreasonable and/or loan shark territory.
For lenders
There are three cases where lenders use these clauses, namely to recover:
- the cost of due diligence. We recognise that this is reasonable so long as the sum claimed is proportionate to the work and not gouging. Obviously if the borrower withdraws from the loan the day after signing the letter of offer and no work is performed by the lender it will be hard to justify.
- an establishment fee if the borrower withdraws where the lender, in good faith, did all or a large proportion of the work necessary to process the loan and then is not paid because the borrower decides to withdraw. We think this is reasonable provided the establishment fee is not excessive and the borrowers were commercially astute enough to have understood what they were signing. This is less likely to be the case where the security is owner occupied.
- interest. Interest is the time cost of money. If the lender represents contributory investors, or has a small portfolio, then the loss of interest on the funds which were set aside in anticipation of settlement is a genuine loss and we think reasonable. Where the lender has a large treasury it is difficult to see that the money was genuinely set aside. There is rarely justification for charging interest for the entire loan term on funds not advanced.
For brokers
Most disputes over broker mandates arise because there is a disparity between the mandate and the ultimate letter of offer and/or security documents obtained. This can be avoided if, once the initial mandate is signed, subsequent iterations are made so that the final mandate matches exactly the letter of offer obtained. In other words the nitty gritty of the negotiation between the parties should be conducted via interactions of the broker’s mandate before the identity of the lender is revealed. If there is symmetry between the two and if the failure of the loan to proceed was not the broker’s fault then the placing of such caveats can be reagrded as reasonable and maintainable.
For legal fees
If the legal work has been done and the loan does not proceed through no fault of the lender someone still has to pay the lender’s solicitor. We fell that this is reasonable provided that only work that has actually been done, or disbursements actually incurred are sought to be recovered.
Our position
For ethical and commercial reasons we will only act for a broker or lender who wishes to lodge or maintain such a caveat if:
The proposed finance is first registered mortgage finance (no second mortgages or caveat loans).
The caveat is not being placed on a third-party guarantor’s property.
The caveat is not being placed on an owner occupier’s home.
There was not already a caveat on the property at the time the mandate or loan offer is signed.
The lower interest rate under the proposed facility is < RBA +5%
The higher interest rate under the proposed facility is < RBA +7%
The upper bracket of the higher rate and lower rate must be disclosed in the mandate or letter of offer.
The upper bracket of the total cost of the loan must be disclosed in the mandate or letter of offer.
