Loan refinancing costly and stressful

Diane and Richard own a manufacturing business on a rural property.  They had existing debt of about $1,000,000 with a bank, secured against their property worth about $1,550,000.

 

Unexpected IRD debt

Diane and Richard found themselves unexpectedly owing IRD approximately $130,000 in overdue tax and penalties.  Diane and Richard called their mortgage broker, Tim, for help in finding the money to pay the IRD debt.

 

Bank declines to lend

Tim introduced them to a new accountant, and informally approached a number of lenders about refinancing Diane and Richard’s existing $1,000,000 loan and borrowing an additional $130,000 to pay the IRD debt. 

Tim told Diane and Richard that their existing bank was not prepared to help because it was uncomfortable refinancing IRD debt and it had concerns about securing the debt against a rural property. 

 

Another lender found, for a $17,040 fee

Tim said he may be able to find finance with another lender, and asked Diane and Richard to sign a broker mandate, agreeing to pay Tim $17,040 to refinance their lending.

Tim secured finance with another lender, but the interest rate was much higher than the rate charged by Diane and Richard’s bank.  When Richard expressed some concern about the proposal, Tim reassured him that they would be able to refinance the lending with a mainstream bank within about three months.  Diane and Richard decided to proceed.

 

Problems on settlement day

On settlement day Diane and Richard discovered there was not enough money to:

  • refinance the $1,000,000 lending
  • pay IRD $130,000
  • pay their bank’s early repayment cost of $20,000
  • and Tim’s $17,040 fee

because Tim’s pre-settlement calculations had only allowed $6,000 for the early repayment cost.

Also on settlement day Diane and Richard’s lawyer and existing bank manager expressed concerns about the amount Tim was charging to arrange finance. 

Diane and Richard’s lawyer alerted Diane and Richard to a clause in the contract with their new lender which would mean they would not be able to refinance the lending for three years without paying three months’ interest as an early repayment cost.

The bank manager also told Diane and Richard that Tim had never approached him about the bank refinancing the lending.  The bank manager said that while the bank was uncomfortable refinancing IRD debt, it would have considered a lending proposal from Diane and Richard. 

Settlement took place, but was delayed while Tim tried to negotiate with the bank over the early repayment cost, causing the early repayment cost to increase even more. The bank did not agree to reduce the early repayment cost.

 

Complaint to the broker

Richard and Diane said they should not have to pay the $17,040 fee because it was too high and they were not happy with Tim’s service, particularly his:

  • failing to approach their own bank about refinancing
  • failing to include an accurate early repayment cost in the refinancing calculations
  • misrepresenting the terms of the new lending.

Diane and Richard reluctantly agreed to pay Tim $10,000, and thought that was the end of the matter.

 

Broker starts debt recovery action

Tim contacted Diane and Richard, saying that if they did not pay the outstanding $7,040 he would put a caveat over their property, take them to the Disputes Tribunal and if necessary bankrupt them.  Diane and Richard felt threatened and bullied, and contacted their lawyer for help.  At about the same time another financial adviser referred Diane and Richard to FSCL.

The Disputes Tribunal agreed to vacate the hearing date until we had considered Diane and Richard’s complaint. 

 

Diane and Richard’s view

Diane and Richard said when they had signed the broker mandate, agreeing to pay Tim $17,040, they were under considerable emotional and financial stress.  If their bank was not prepared to refinance the IRD debt, they did not know what they were going to do.

Then when the settlement did not go smoothly, and Diane and Richard contacted Tim to complain, Tim’s reaction left them with no option but to contact their lawyer, incurring more costs.

 

Review

We were concerned about both the level of Tim’s fee and the service he had provided.

 

Tim did not discuss refinancing with existing bank

Although Tim had contacted the existing bank at an early stage for an early repayment cost quote, and referred to a discussion with the bank manager in an email, we were not convinced he had had a robust conversation with the bank manager about refinancing Diane and Richard’s debt. 

When we contacted the bank manager for comment, he provided diary notes showing no contact between the early repayment cost quote in April and the refinancing in November.  The bank manager confirmed Tim had never asked to refinance Diane and Richard’s lending with the bank.  Although the bank manager could not say whether the bank would have approved the loan, he had no concerns about the loan security, and would not have discouraged an application.

 

Service substandard, but no direct loss

In our view, Tim had not given Diane and Richard a reasonable level of service.  Tim failed to fully explore lending with the existing bank, and had not considered the possibility of refinancing the IRD debt alone with a second-tier lender.  Tim had given Diane and Richard the impression that their options were very much more limited than they otherwise might have been.

We were also satisfied that Tim had given Diane and Richard the impression they would be able to refinance the new lending with a mainstream bank within three months.  This was not the case, and Diane and Richard would have to remain with the new lender for at least three years.

 

$10,000 reasonable payment for service provided

We agreed that it was reasonable for Tim to be paid for the service he provided, but thought the $17,500 fee was too high. We obtained opinions from two respected and experienced mortgage brokers. Both brokers expressed concern at the fee charged saying, in their experience, the maximum they would have expected Tim to charge would be $10,000. 

Taking into account the expert advice, we recommended Tim accept the $10,000 already paid in full and final settlement of Diane and Richard’s debt, and discontinue the Disputes Tribunal hearing.

 

Failure to obtain early repayment cost quote caused settlement day stress and costs

Tim said the insufficient funds on settlement day were caused by falling interest rates, increasing the early repayment cost.  We accepted the increasing early repayment cost was outside Tim’s control but, as an experienced mortgage broker, he should have been aware that falling interest rates can cause a dramatic increase in the early repayment cost. 

Although Tim had obtained an early repayment cost quote of about $3,000 from the bank in April, and had allowed $6,000 in his calculations, he had not contacted the bank for a more up-to-date quote.  If Tim had done so, an allowance could have been made in the refinancing calculations, avoiding some of the stress and inconvenience caused on settlement day.

The insufficient funds on settlement day caused a two-day delay in settlement, during which time the early repayment cost increased by a further $721.36.  We considered it reasonable that Tim compensate Diane and Richard for the increased cost.

 

Complaint made following settlement day

Following settlement Richard said he called Tim to complain about the amount of his fee, and the problems on settlement day.  Tim did not accept that Richard had a complaint, and said Diane and Richard were simply asking for more time to pay.  When Tim did not receive the money, he started debt recovery action.

We were satisfied from email exchanges between Diane, Richard, and Tim that Tim was aware of Diane and Richard’s complaint.

Even if Tim was having difficulty establishing exactly what the complaint was he should have referred Diane and Richard to FSCLs instead of commencing legal action.  We considered it reasonable for Tim to compensate Diane and Richard for half of the legal costs incurred after settlement being $2,260. We discounted the costs payable because Diane and Richard’s lawyer should have been aware of their right to refer a complaint to us.

 

Outcome

We recommended, and Diane and Richard accepted, that Tim:

  • accept $10,000 in full and final settlement of Diane and Richard’s debt
  • write off the residual $7,040 owing
  • advise the Disputes Tribunal he is not taking the matter any further
  • pay Diane and Richard $721.36 as compensation for the additional early repayment cost
  • pay Diane and Richard $2,260 towards their legal fees
  • pay Diane and Richard $2,000 in compensation for stress and inconvenience.

 

Our insight

This complaint provides a valuable learning opportunity.

 

Payment must be reasonable

Mortgage brokers are entitled to be paid for the service they provide.  If a broker is not being paid by the lender in the form of a commission, it follows that payment must come from the client.  We expect the fee to be properly disclosed to the client, and be a reasonable reflection of the time spent, the level of service and the broker’s expertise. 

 

Obligation to provide a service with reasonable care and skill

Even if a client has agreed to pay for a service, that service has to be provided with reasonable care and skill.  In this case, we were not satisfied that Tim met his obligations to his clients, and that formed the basis for our decision that compensation was payable.

 

Complaints should be referred to FSCL

Finally, where a client expresses dissatisfaction, a broker is obliged to consider the complaint through its internal complaints process.  If a broker is confused about the nature of a complaint, we would expect the broker to write to the client clearly setting out the complaints process, and inviting the client to either participate in that process or contact FSCL.  

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