Bransgroves acts exclusively for lenders. We do not, however, act for all lenders. There is a category of we want no part of. This policy explains what we mean by the term predatory lending, how we recognize it, and why we decline such work.
We are proud to act for private lenders. Private lending performs a vital economic function: it funds developers, business people and investors whom the banks cannot or will not serve. But there is a dark fringe to the industry, and we have made a deliberate decision not to service it. This policy sets out where we draw the line.
What we mean by predatory lending
A predatory lender is a lender whose business model depends not on the borrower performing, but on the borrower failing. The loan is not priced to be repaid; it is priced, structured and timed to default, so that the lender can harvest default interest, fees and ultimately the borrower’s equity.
There are other behaviors we deem predatory moving the goal posts after a desperate borrower has committed to the lender on the basis of supposed revelations of due diligence when the lender suspected them all along.
A distinguishing feature of predatory lending is that the lender’s best outcome is the borrower’s worst. A legitimate lender wants to be repaid. A predatory lender loans to own.
Private credit is risk-priced, and risk-pricing is legitimate. Predatory lending is defined by pricing, structure or conduct that has crossed from compensating for risk into exploiting distress.
Interest rates that are simply too high
There is no statutory usury cap on commercial lending in Australia, but there is a point at which a rate ceases to be a price for money and becomes an instrument of expropriation. Where, in our opinion, the interest rate is so high that it cannot be explained by any rational assessment of risk we will not lend.
A rate defensible for a mezzanine facility over a development that is already in trouble, and where the lender can only recover if the property is completed so that everyone’s chestnuts pulled from the fire, is perfectly appropriate. Sometimes any rate for such a service is acceptable if it can help the borrower avoid bankruptcy and the loss of their home etc. By contrast improvident ventures financed at high interest rates by commercially unsophisticated people secured over their own home the family home is unacceptable.
Interest quoted “per month”
Quoting interest as a monthly figure — “4% per month” rather than “48% per annum” — is the classic camouflage of the loan shark. Its only purpose is to make an extortionate rate look small. Legitimate lenders quote per annum. We regard per-month rate quotation as a red flag of the first order, and where it appears to have been used to obscure the true cost of credit from the borrower, we will not act.
Interest expressed as a per-month amount is, in our view, a deliberate device to disguise the effective annual rate from an unsophisticated borrower. It is the numerical equivalent of fine print. We do not act on loans marketed this way and we certainly only document based on the annual interest rate.
Loans the borrower cannot comply with from the outset
Where it is apparent to us, at the outset, that there is no realistic way the borrower can comply with the loan — no capacity to service the interest, no credible exit, no plausible refinance or sale within the term — we will not act. A loan that is designed to default is not really a loan; it is a mechanism for equity stripping.
The High Court’s decision in Stubbings v Jams 2 Pty Ltd [2022] HCA 6 is an example, lending to a borrower who obviously cannot repay, while shutting one’s eyes to that fact, is unconscionable, and the security is liable to be set aside. We decline such loans and the lenders not only because they are commercially and legally doomed, but because of their immorality.
Every sound loan has an exit: a sale, a refinance, a completion, an income stream. Where a proposed loan has no credible exit — where interest is capitalising against a borrower with no income, no sale campaign, no refinance prospect and no realistic path to discharge — the only “exit” is a mortgagee sale.
Asset stripping
Where the loan appears to us to be, in substance, a device to strip the borrower of an asset — typically a loan at high rates, over a property with substantial equity, to a borrower in distress, with a short term and no genuine exit — we will decline to act.
Equity stripping is the end-game of every predatory loan: identify a distressed owner with equity, advance a fraction of the property’s value at a crushing rate, wait for the inevitable default, and take the property through mortgagee sale, harvesting default interest and fees along the way. It is theft with paperwork.
We distinguish sharply between asset-based lending and asset stripping. Asset-based lending — lending primarily against the value of security, with a genuine intention and expectation of repayment — is a legitimate and long-established form of commercial credit.
Warning signs of asset stripping include: a large equity buffer coupled with obviously unserviceable pricing; prepaid or capitalised interest exhausting the advance; a borrower manifestly in distress; a security property that is the borrower’s home; pressure to settle at abnormal speed; and default interest and fee structures that reward failure. Where these features cluster, we decline.
Why we take this position
First and foremost, we decline this work because it is wrong. Predatory lending destroys people. It takes homes from the desperate, the elderly and the naive. No fee justifies participation in it.
Lawyers are not moral bystanders to their clients’ transactions. A solicitor who documents a loan he knows to be a trap is part of the trap. Some would say that lawyers who act for loan sharks are the scum of the Earth, especially if they join the plunder with gouging high fees and the involvement of receivers who share in the plunder.
Legal defenses
It is true the legal defenses available to victims of predatory loans is formidable: general law unconscionability and unconscionability s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth); unjustness under the Contracts Review Act 1980 (NSW); and statutory provisions against unfair contract terms. However, it is necessarily incomplete. It cannot be made complete without shutting down too much of what is legitimate and assists borrowers with their business ventures.
Because of the company it would put us in
Third, our clients are reputable: mortgage funds, AFSL holders, family offices, banks, and self-funded retirees lending their superannuation. They lend to be repaid. They deserve a law firm whose name signals to brokers, borrowers’ solicitors, insurers and the courts that the transaction is a proper one.
How the policy operates in practice
We apply this policy at three points: at file-opening, when the term sheet first arrives; during due diligence, if facts emerge that change the complexion of the transaction; and at any later point in the retainer, including enforcement. A lender that looked legitimate at settlement may reveal their true character in enforcement, and we reserve the right to cease acting at any stage.
Related policies
Predatory lending rarely presents as a single vice; the same transaction will often trip several of our policies at once. This policy should therefore be read together with three others, each of which addresses a recurring pattern of the conduct described above:
Elderly Borrowers — the elderly are the loan shark’s preferred prey: equity-rich, income-poor, trusting, and often signing for the benefit of a child or grandchild. That policy collects four decades of authority, from Amadio to Stubbings, in which the courts have set such loans aside.
Mortgages over Parent’s Home — loans to “entrepreneurs” secured by their parents’ home are, in our opinion, improvident by definition, and we advise our lender clients not to make them. Many of the asset-stripping transactions described above take exactly this form.
Third Party Mortgages — where security is given for another’s debt, we apply our “experienced insolvency practitioner” test: would a skilled, financially literate child or sibling advise the guarantor to sign? If not, our clients should walk away. A third-party mortgage that fails that test and also bears the indicia in this policy is the archetypal predatory loan.