The first day of royal commission hearings into SME lending practices uncovered a disturbing example of a frail elderly woman being threatened with homelessness after she guaranteed a business loan for her daughter.
Carolyn Flanagan testified that she did not receive legal advice pertaining to signing the guarantor contract, despite it being a requirement under the banking code of conduct — the closest thing that business borrowers have to regulated standards.
Ms Flanagan was asked by her daughter and her daughter’s partner to go guarantor on a business loan to purchase a franchise, using her home as security.
Although rules state that lenders must advise would-be guarantors to seek independent legal and financial advice prior to signing an agreement, Ms Flanagan testified to the commission that no such recommendation was made, and that is if it was, she would have left the bank and sought the help of Legal Aid.
However the pensioner, who suffers from a range of health problems, is legally blind and has some trouble speaking, admitted under cross-examination that her memory of events is poor, in part due to her ill health in addition to the passage of time.
Nevertheless, she was held up as an example of someone who did not fully understand the agreement into which she was entering.
The loan subsequently fell into arears and the bank came knocking to repossess her home, threatening to make her homeless in the process. They eventually came to an arrangement deferring the repayment to instead come from the sale of the property or as part of Ms Flanagan's estate after death.
In a startling admission, Alastair Welsh, Westpac's general manager of commercial banking, admitted to the commission that while the case could have been handled better, technically the bank had done nothing wrong by accepting Ms Flanagan’s guarantee over the loan.
When asked, given her frail state and inability to read, whether Ms Flanagan’s agreement to guarantee a loan should have been accepted, Mr Welsh replied that “technically there's not a problem.”
He said that the duty of the bank’s lending managers is simply to ensure an asset is capable of covering the loan and that the guarantor is fully aware of the liabilities they are potentially exposed to. The financial or physical health of the guarantor, or the position they would be left in should the guarantee be called upon, is not brought into question.
However, a visibly flummoxed Mr Welsh admitted there were warning signs that Ms Flanagan did not fully comprehend what she was signing, which the lending manager should have noticed.
Westpac has been contacted for comment on the matter.
Mr Welsh’s testimony came after the bank forced a 15-minute recess by producing the original loan documents at the last minute, which even Ms Flanagan’s legal counsel had not previously seen. That document showed Ms Flanagan had had legal representation at the time, though her testimony clearly demonstrated that her understanding of what she had signed was severely lacking.
Dana Beiglari from Legal Aid NSW, who has been representing Ms Flanagan since the eviction notices began rolling in, said it was a common scenario facing her clients.
“In nearly all of the cases I have seen at Legal Aid, the client did not understand what they were signing up to,” she said.
Even those who have received legal representation do not often understand what is actually being signed, and there are even question marks over whether that legal advice is actually independent, Ms Beiglari said.
“[For example,] it’s very rare for clients to understand their Centrelink payments may be reduced if the guarantee is called upon.”
Anyone considering going guarantor on a loan is advised to seek independent legal and financial advice before doing so — and that said advice is truly independent (i.e., not offered by a lender or the individual covered by the guarantee).
Check out My Business’ live blog of the royal commission as it happens from 9.45am every weekday to stay up-to-date with all the latest happenings.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.
Ask the Experts: Does automation stack up financially?
By Christopher Overton
Opinion: How bad do things have to get?!
By Adam Zuchetti
Business lessons from the All Blacks
By Steve Stanley