CAVEAT EMPTOR! … BUYER BEWARE …
This couple went to a small business lender — within two years they had lost their house
Updated Thu 28 November 2019
In an age of sky-high house prices and record debt, Kirsty Garrash and Francis Murphy were close to reaching a financial milestone many homebuyers can only dream about — they owned their family home outright.
- Kirsty Garrash and Francis Murphy lost their house after borrowing from a small business lender
- Small business lenders are largely unregulated
- Small business and consumer credit bodies are calling for greater checks on lending to small businesses
But, now, just two years later, the couple and their five children have been left homeless, victims of a short-term business loan that ended up costing them an annual interest rate of 150 per cent.
“It’s devastating,” Ms Garrash told 7.30.
“In hindsight, I’d never get a loan like that. It undid everything we worked so hard for.”
Their case is symptomatic of the largely unregulated world of small business finance in Australia, where lenders are not obliged to make sure borrowers are taking out loans they can afford.
“It is the wild west,” said Gerard Brody, chief executive of the Consumer Action Law Centre.
“People can go online or to a broker and get access to an unregulated loan all too easily.”
The consequences for borrowers like Ms Garrash and Mr Murphy, who used their family home as security, can be catastrophic.
‘I feel like we’ve failed’
In 2017, the couple sought a $300,000 loan from Sydney-based firm Mango Credit, which they used to pay off other debts and expand their excavation business on the New South Wales Central Coast.
They agreed to make repayments of $5,250 a month, but this would jump to $37,500 a month if they ever fell behind on the loan.
That is exactly what happened in January when they went into default while they tried to refinance the loan.
From there, the couple plunged into financial meltdown.
In September, they lost a last-minute legal bid to halt Mango Credit’s repossession of their house.
Two weeks ago, the sheriff came to confiscate their keys and change the locks.
“It feels like we’ve failed,” Ms Garrash said.
Their family is now living in a neighbour’s living room while they search for a house to rent.
*It is the kind of financial calamity that Australia’s consumer lending rules are supposed to prevent.
*But because Ms Garrash and Mr Murphy’s loan was taken out in the name of their business, the normal consumer protections do not apply.
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Borrowers ‘have nowhere to turn’
*Business lending is not covered by the National Credit Code, which only applies to home loans, credit cards and other types of personal finance.
Small business lenders also do not need an Australian Credit Licence to operate, so their lending practices are not regulated by the Australian Securities and Investments Commission (ASIC).
And, as Ms Garrash and Mr Murphy discovered, lenders like Mango Credit are not required to be registered with the Australian Financial Complaints Authority (AFCA).
That means, if a borrower gets in a dispute they can’t resolve with one of the many unregistered lenders offering loans to small businesses, their only option is to go to court.
AFCA told the couple in May that it could not consider their complaint because Mango Credit does not come under its jurisdiction.
“Mango Credit has nobody holding them accountable. They can do what they like,” Ms Garrash said.
“You literally have nowhere to turn and no one to help.”
Mango Credit declined 7.30’s request for an interview, but through its lawyers the company disputed the couple’s version of events leading up to the default and repossession of the house.
Ms Garrash and Mr Murphy claim Mango Credit’s owner, Yanis Derums, verbally agreed to halt their repayments in December last year while they applied with another lender to refinance the loan.
They say when they did not pay January’s instalment, Mango Credit put them in default and started charging them the penalty interest rate of 150 per cent.
“Our client denies the making of any such recommendation,” the statement from Mr Derums’ lawyer said.
Mango Credit also says it had held off on putting the loan into default earlier after Ms Garrash and Mr Francis were late in making some repayments last year.
“Our client was entitled to charge the borrowers interest at the higher rate of interest, but nevertheless charged the borrowers and accepted the lower rate of interest,” the statement said.
Mr Derums also says his company was open to accepting a reduced final amount to finalise the loan after the default.
“It was conveyed to Ms Garrash that our client is so amenable and to put any such offers in writing,” his lawyers said.
“Surprisingly, no offers have been forthcoming at any time from the borrowers directly or through their legal representatives or financial advisors,” the statement said.
Mr Derums also rejected suggestions the terms of the loan were unfair.
“The borrowers obtained independent legal and financial advice in respect of the loan,” his lawyers said.
Calls for tighter regulation
Now, there is a push from consumer groups and Australia’s small business watchdog to tighten regulation of the sector to bring it closer into line with consumer lending rules.
The Small Business and Family Enterprises Ombudsman Kate Carnell believes all lenders should be subject to the AFCA regime.
“I think small businesses have no idea this is not regulated, have no idea that they have no recourse apart from the courts,” she said.
“We need to broaden access to mediation and other forms of justice outside the court system so that small businesses have got somewhere else to go if a non-bank lender does the wrong thing.”
Ms Carnell’s call comes after the final report of the financial services royal commission recommended no changes to the current rules for small business lending.
Mr Brody said that recommendation was a missed opportunity.
“I actually think that’s a mistake. In our submissions we said that there should be checks placed on small business lenders, particularly where loans are secured by a residential property,” he said.
“If that goes south it risks their house, individual wellbeing, their security and their health.”
Earlier this year, seven major small business lenders, including Prospa, OnDeck and Spotcap, signed a voluntary code of practice that requires them to be clear and concise about their interest rates and contract terms.
“That’s around 90 per cent of the market at the moment. We don’t have 100 per cent coverage yet, but we’re working on that,” Dianne Tate, chief executive of the Australian Finance Industry Association, told 7.30.
“The code of practice is really important because it sets standards higher than those contained in the law.”
The code also obliges signatories to be members of AFCA.
“So that means if a small business customer has a dispute with one of our financiers and they aren’t able to resolve it directly they can go to AFCA to get their dispute resolved,” Ms Tate said.
Consumer groups have also raised concerns about so-called “sham lending”, where borrowers take out loans in a company name but ultimately use the money to buy a home or investment property.
It is a strategy they say is sometimes used by lenders and borrowers to avoid consumer protection laws.
“If you borrow from an unlicensed lender for the purpose of purchasing property or for any other personal or domestic purposes, then it should be actually covered by consumer credit laws,” Mr Brody said.
‘A very big loophole’
Melbourne retiree Carrol James got a loan from unlicensed business lender Prime Capital when she went in search of finance for a townhouse she was building for herself in 2015.
“I explained the reasons why I needed the finance, and he said they could help me but I needed to have a company name in order for them to lend me the money,” she said.
She borrowed in the name of her self-managed superannuation fund, even though the home would be owned and occupied by her personally and the terms of the loan contract make clear that it was only to be used for business purposes.
“It was actually for me, and they knew that,” she said.
“I explained that to them before they gave me the letter of offer.”
Ms James said she took full responsibility for signing documents saying the loan was for business purposes, even though it was for her personal use.
Prime Capital declined to do an interview, but in a statement denied Ms James told ever the company that the money was for personal property.
“The client provided information that the funds were required to complete a development project,” the statement said.
“The client then obtained independent legal advice on the transaction, and we are aware that lawyer informed the facility must be used for business purposes, and any non-business purpose would be a breach of the facility.
“The client also signed declarations to us that the funds would be used for business purposes.”
The annual interest rate on the $360,000 loan was 24 per cent, with monthly repayments of $9,000, including administration fees of $1,800.
She hoped to only have the loan for three to four months until the unit was completed.
Ms James says she was managing the repayments on the loan until her builder went bust mid-way through the project.
She wanted to refinance with another lender with a lower interest rate, but she says despite repeated requests it took Prime Capital more than five months to get her the loan documents her new lender required.
She estimates the delay increased the total cost of the loan to around $130,000 in interest fees.
“I reached out to consumer affairs, the Financial Ombudsman Service and also to ASIC, and I was told from every one of them there was nothing they could do to help me,” Ms James said.
“There is actually a very big loophole in the system where these lenders don’t actually come under any governing body at all. So there’s no one to keep them accountable.
“I’m the one who signed the agreement, the loan contract.
“But I think Prime Capital need to take responsibility for the hardship they have caused me.”
Prime Capital apologised for the delay in providing Ms James with her documents.
“We accept that these procedures were unhelpful and bureaucratic,” the company said.
There is no suggestion Prime Capital or any of its staff have broken the law.