The story
Jeremy borrowed money from Daffodil Finance, secured by a mortgage over his home. Jeremy was friends with the Daffodil Finance CEO, Amanda, and liked the company’s culture.
When Jeremy experienced financial difficulty, Amanda offered to buy his home, allowing him to repay his Daffodil Finance loan. Daffodil Finance then approved a new $100,000 loan to Jeremy. Amanda said she would allow Jeremy to use his old home, the property she had just purchased, as security for the new loan.
Jeremy used $80,000 of the loan to pay for repairs to his business premises and kept $20,000 in an account to fund his loan repayments. Jeremy explained his work took him overseas for long periods so he needed to make sure there would be funds in New Zealand to repay the loan. Another Daffodil Finance employee, Samuel, manually made the weekly loan repayments from Jeremy’s current account to the loan account.
A little while later, Tree Tops Finance purchased Daffodil Finance. Shortly after the purchase Samuel left Daffodil Finance and stopped making the manual loan repayments on Jeremy’s loan. When Jeremy’s payments stopped, Tree Tops Finance took a closer look at Jeremy’s account and discovered Jeremy’s loan was unsecured. Daffodil Finance had not taken steps to secure the loan against Amanda’s house.
Jeremy was working overseas and Tree Tops Finance was unable to reach him. Tree Tops Finance became very concerned and moved the $20,000 Jeremy had set aside for loan repayments into an account he could not access, so as to provide some security for the loan. Tree Tops Finance also increased the interest rate on Jeremy’s loan from the home loan rate to the personal loan rate.
Dispute
When Jeremy returned from overseas he was shocked to discover Tree Tops Finance had moved the $20,000 out of his control and was charging him a much higher interest rate. Jeremy said he needed the $20,000 to make the the loan payments and was unable to clear the loan arrears. Jeremy wanted Tree Tops Finance to return the $20,000 to his current account and continue to charge him the secured home loan interest rate. Amanda remained prepared to offer her house as security to Tree Tops Finance, but only as a second mortgagee. Tree Tops Finance was not prepared to accept secondary security, considered it was entitled to hold the $20,000 as security for the loan and would not reinstate the home loan interest rate.
Jeremy did not agree to pay the personal loan interest rate. Jeremy said it was Daffodil Finance’s fault that the loan was unsecured, and it was unfair for him to bear the cost. Tree Tops Finance had purchased Daffodil Finance including Daffodil Finance’s mistakes. Jeremy was upset at the way Tree Tops Finance had treated him. He felt intimidated and bullied and resented the inferences about his contribution to the error. Jeremy said he would not repay the loan and Tree Tops Finance could bankrupt him if necessary.
FSCL’s review
When Jeremy borrowed the $100,000 from Tree Tops Finance he signed a loan agreement agreeing to repay the debt. The loan agreement listed Amanda’s property as security, but Daffodil Finance did not ever take a mortgage over Amanda’s property. Although all parties intended the loan to be secured, as a result of Daffodil Finance’s error, the loan was not secured. We could not see any evidence that Jeremy had contributed to the error and considered Tree Tops Finance had little option but to accept it had purchased an unsecured loan.
However the loan agreement also gave Daffodil Finance, and now Tree Tops Finance, certain rights if Jeremy did not repay the debt. We could understand why Tree Tops Finance’s decision to hold the $20,000 as security upset Jeremy, but we explained to Jeremy that the loan agreement allowed Tree Tops Finance to ‘off set’ the $20,000 in his loan funding account against the $100,000 loan.
Outcome
We proposed, and Jeremy agreed, that he would continue to repay the loan, and give Tree Tops Finance security over the $20,000 in an interest bearing account. In return Tree Tops Finance agreed to charge interest on the remaining $80,000 loan at the standard home loan interest rate and to refund the interest charged in excess of the standard interest rate.
