Sep 9, 2013 - auction, the real estate agent will commence a four week marketing campaign. ... There were also phone and
Determination Case number: 313410 Credit - Consumer Credit - Home Loans - FSP Decision - Maladministration in loan management 9 September 2013
Background 1.
As advised to the parties, the Financial Ombudsman Service (FOS) has considered it appropriate to expedite the dispute in accordance with the Operational Guidelines to the FOS Terms of Reference. The dispute has not been the subject of a Recommendation and has proceeded directly to Determination.
2.
In November 2005 the Applicant and her late partner obtained a home loan of $220,000 (the home loan) from the Financial Services Provider (FSP). The home loan was secured by the C property (the property). The Applicant made a previous claim in relation to the home loan which has been dealt with in FOS dispute 109070. Therefore, any issues raised by the Applicant in relation to the home loan in dispute 109070 will not be considered in this dispute.
3.
Following the closure of FOS dispute 109070, the Applicant voluntarily surrendered the property to the FSP for mortgagee sale on 12 September 2011. The FSP obtained default judgment for possession of the property on 27 September 2011. Consent orders to set aside the default judgment were filed in the County Court on 18 October 2011.
4.
The FSP sold the property on 5 March 2012 for $390,100. The home loan was paid out in full and surplus funds of $86,981.69 are payable to the Applicant.
5.
This dispute is about:
Whether the FSP conducted the mortgagee sale process in accordance with its obligations, and if not, whether the Applicant entitled to compensation.
Whether the legal costs charged to the Applicant’s loan account after the property was surrendered for sale were reasonably and properly incurred.
What would be an appropriate resolution of this dispute.
Case No: 313410
Determination
Page 1 of 10
Reasons for decision Mortgagee Sale What are the FSP’s obligations as mortgagee in possession? 6.
A mortgagee exercising a power of sale in Victoria is required to comply with Section 77 of the Transfer of Land Act 1958 which says that a mortgagee should act in good faith and have regard to the interest of the mortgagor. This reflects the duty at common law to sell an asset in good faith and without reckless or wilful disregard for the interests of the mortgagor. This duty to act in good faith includes acting honestly and not fraudulently and applies to each step in the sale process.
7.
Also, as a signatory to the Code of Banking Practice (CBP), the FSP is required to act fairly and reasonably towards its customers under Clause 2.2. FOS further expects that an FSP will act at all times in accordance with good industry practice.
8.
In FOS’s view, the minimum reasonable standard for good industry practice is that all reasonable care should be taken to sell the mortgagor’s property at not less than the market value or, if a market value cannot be ascertained, then at the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.
9.
The obligation on a mortgagee is to obtain market value which is defined as: “the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”
10.
While a mortgagee is, in a practical sense, compelled to sell the property, this does not mean it is only entitled to obtain the forced sale value which may be included in a valuation.
11.
In order to establish a successful claim that a mortgagee breached its duties, an applicant must establish on the balance of probabilities that the mortgagee did not meet its obligations as a diligent and prudent FSP. This is what we will assess by having regard to industry practice. The question of whether a mortgagee has complied with its duties in selling an asset is a question of fact which we determine on a case b y case basis.
12.
FOS does not conduct its own valuations of real property when we investigate disputes that raise the issue of whether a mortgagee sold mortgaged property at under value.
13.
When a property is being sold by a mortgagee in possession, standard industry practice generally requires:
Case No: 313410
Determination
Page 2 of 10
An appropriate marketing period (where the property is to be sold by auction) with suitable advertising in local and national newspapers or reputable internet sites specialising in the sale of real estate;
An independent valuation prior to the setting of a reserve.
General maintenance of the property to ensure that it is fit for sale; and
The property to be sold without unreasonable delay. However, a financial services provider is not required to delay the sale of a property if there are concerns about market fluctuations.
Was the advertising campaign adequate? 14.
The FSP was required to appropriately advertise the property for sale. Without adequate advertising, it is impossible to be satisfied that the market has been properly tested and therefore to be satisfied that the price obtained was a fair market value. In addition, the FSP’s policy states that prior to the auction, the real estate agent will commence a four week marketing campaign. During this campaign, the agent will provide the FSP with a weekly inspection report. That report will disclose how much interest the agent has had in the property and how many hits there has been on the agent’s internet page for the property.
15.
The marketing campaign conducted by the FSP’s agent was commenced on 28 January 2012 for a four week period prior to the scheduled auction on 25 February 2012. The property was advertised in the local newspapers and on at least four online websites. Flyers were also distributed by the agent to houses in the local area. A sign was displayed at the property and the property was displayed in the agent’s window.
16.
The agent also conducted open for inspection appointments at the property prior to the auction. In total, 21 interested parties attended at the property for the “open for inspections”. There were also phone and email enquiries made to the agent throughout the marketing campaign. The agent also provided the weekly inspection report to the FSP as req uired pursuant to its internal policy guidelines.
17.
Based on the available information I am satisfied that the FSP’s agent conducted an appropriate and thorough marketing campaign in accordance with standard industry practice and the FSP’s internal policy.
Valuations 18.
A mortgagee in possession is required to take reasonable steps to ascertain the value of a repossessed property before selling it, with the usual means being to obtain an independent sworn valuation.
Case No: 313410
Determination
Page 3 of 10
19.
It is standard industry practice for the FSP to obtain at least one sworn valuation in the absence of a reasonable explanation as to why this was not done.
20.
The FSP’s materials reveal that two independent valuation reports were obtained for the property being: Valuer
Date of valuation
Valuation/ Range ($)
BR
18 October 2011
$380,000 to $420,000.
CKC
24 October 2011
$340,000 to $370,000
21.
The FSP’s Agent also provided a Market Opinion stating a market range of $390,000 to $440,000 based on a comparative market analysis.
22.
The Applicant says that the property’s true market value was greater than the market ranges expressed by the FSP’s independent valuations as evidenced by two appraisals that she received from local real estate agents – being as follows: Agent
Date of appraisal
Range ($)
C
8 March 2011
$480,000 to $530,000
HS
8 March 2011
$500,000 to $550,000
23.
The Applicant’s appraisals were obtained in March 2011, seven months prior to the FSP’s sworn valuations. Property sale prices are likely to have fluctuated throughout this period. I consider that the FSP’s sworn valuations obtained closer to the sale of the property are a more accurate indication of the market range which could be achieved for the property.
24.
The Applicant says that the FSP and the Valuers engaged to provide the independent valuations were in collusion. FOS is unable to consider a dispute about any alleged collusion between the FSP and the Valuers, as such a claim necessarily involves obtaining evidence from third parties. As the various parties named by the Applicant are not participants in the FOS dispute resolution scheme, FOS has no jurisdiction over them. It follows that such a claim is more appropriately dealt with in court where they can be joined as a party and evidence taken on oath. FOS is not a court and FOS is not able to take evidence on oath, or compel evidence from third parties. On that basis, a court is a more appropriate place for consideration of such a claim.
25.
It is good industry practice for a mortgagee in possession to obtain advice on a reserve price and take reasonable care in setting that price when selling a mortgagor’s property. In this instance, the FSP set the reserve price at
Case No: 313410
Determination
Page 4 of 10
$400,000 prior to the auction. However, once the auction commenced on 25 February 2012, and the bidding slowed, the agent received permission from the FSP to revise the reserve price to $380,000. This reserve price appears reasonable bearing in mind the range of market values disclosed in the two valuations and the comparative market analysis undertaken by the FSP’s agent. Improvements before sale 26.
There is no general obligation on the FSP to make improvements to a property before sale. However, there are some forms of expenditure which may be regarded as prudent to assist with the sale process, including general maintenance and usual repairs to ensure the property is fit for sale.
27.
The FSP has provided materials including information from the appointed agent that they requested approval to undertake general cleaning of the interior and some garden maintenance for the external areas of the property. The works were undertaken prior to the marketing program being commenced on 28 January 2012.
28.
Despite the FSP not being able to provide me with the invoices for the work performed in this respect, I have reviewed the marketing photos of the property taken for the sale. The property appears to be in a reasonable condition and I am therefore satisfied that the FSP acted appropriately in preparing the property for sale.
29.
The Applicant claims that when she surrendered the property she lost personal belongings which she had to abandon at the property. Despite making a claim that such belongings were valued at $20,000, s he has not provided any information to support this claim. Given that the Applicant voluntarily surrendered the property to the FSP, I consider that the Applicant had sufficient time to move her belongings from the property prior to surrendering it and she has not been able to substantiate her claim for lost belongings.
Auction vs Private Sale 30.
The FOS view is that an appropriately advertised auction is usually the best way to ascertain and obtain the market value for a property.
31.
The property was listed for auction on 25 February 2012. The agent’s marketing reports show that a number of interested parties inspected the property prior to auction. The auction report states that there were 70 people in attendance and three bidders. After a number of bids, a vendor’s bid of $380,000 was made and the property was subsequently passed in with no further bids.
32.
Another interested party made an offer of $370,000 after the auction was completed, which was not accepted. Another party made an offer of $380,000 but it was subject to finance. Auction conditions continued to
Case No: 313410
Determination
Page 5 of 10
apply until 29 February 2012. On 5 March 2012 an offer of $390,100 was accepted by the FSP. 33.
I consider that the FSP adequately offered the property to the market and was entitled to make the commercial decision to accept the offer made on 5 March 2012 after the unsuccessful auction. The sale price was in the mid range of the amounts expressed in the sworn independent valuation reports and therefore a fair market price for the property at that time.
34.
The Applicant says that the auctioneer made comments about the sale being a mortgagee sale at the auction which had an impact on the bidders and resulted in the property being passed in. The FSP denies that any comments of this nature were made. Generally, it would be highly unusual for a real estate agent to make any comments that would affect the sale of a property and I have no information to support the Applicant’s claims in this respect.
35.
In any event, the use of “mortgagee sale” does not necessarily depress the price obtained and may be a considered position to generate bids. The property was not advertised as a “mortgagee sale” but FOS takes the view that if a property is sold using the term “mortgagee sale” it is not necessarily a breach of the FSP’s obligations.
Sale & Legal Expenses 36.
The real estate agent charged $8,367.64 for sale expenses and commission. This was taken into account at settlement of the property.
37.
Legal conveyancing costs of $1,311 were also taken into account at the settlement.
38.
I am satisfied that the FSP:
39.
incurred reasonable advertising and legal expenses for the sale of the property; and
only carried out necessary works and incurred reasonable costs in this respect.
The charges that have been passed on to the Applicant in relation to the sale of the property are reasonable and were properly incurred.
Did the FSP account properly and reasonably and in a timely manner to the Applicant in respect to the sales and the proceeds of the sales? 40.
FOS generally expects that following the sale of a property as mortgagee in possession, a financial services provider should account to the borrower/mortgagor.
41.
Settlement for the sale of the property was completed on 20 April 2012 . The FSP’s solicitors wrote to the Applicant on 9 May 2012 informing her of the settlement and accounting to her for the amount paid to the FSP at
Case No: 313410
Determination
Page 6 of 10
settlement. She was also informed that surplus funds of $86,981.69 less any further legal fees and costs were being held by them for her to receive. 42.
Despite further letters to the Applicant from the solicitors, she has elected not to obtain the surplus funds to date. She also says that she is not satisfied with the amount paid to the FSP at settlement to payout the home loan and therefore that the amount she is to receive as surplus funds is not correct.
Analysis of information 43.
The previous FOS dispute was finalised on the basis that the Applicant accepted a recommendation where the FSP would reduce her overall indebtedness to the FSP by $20,000. The FSP says that in February 2011 it complied with the recommendation and reduced the Applicant’s loans as follows:
Personal loan
$12,229.77
Home loan
$7,770.23
Total
$20,000
44.
I have reviewed the statements for the Applicant’s home loan account and note that on 17 February 2011, a repayment of $7,770.23 was made to the account. The FSP also confirms that the Applicant’s personal loan has been paid out as outlined above.
45.
As the Applicant did not make any repayments to the home loan interest continued to accrue in accordance with the loan contract until the property was sold. I have reviewed the loan account statements and confirm that no repayments were made by the Applicant to the home loan from 17 February 2011 to the account closure when the property was settled in May 2012. Accordingly, the monthly interest payment continued to accrue.
46.
Therefore, on the basis of the available information, I am satisfied that the FSP did properly account in a timely manner to the Applicant about the sale of the property and the proceeds of the sale. She has elected not to obtain the surplus funds which she is entitled to.
Conclusion 46.
I consider that the FSP took all reasonable care to obtain market value for the property in that it adequately offered the property to the market and was entitled to make the commercial decision to accept the offer made after the auction. The materials do not disclose any suggestion of bad faith or dishonesty on the part of the FSP or failure to take reasonable care in each step of the sale process. I am therefore satisfied that the FSP conducted the mortgagee sale process in accordance with its obligations.
Case No: 313410
Determination
Page 7 of 10
Legal costs 47.
The Applicant says that she voluntarily handed the property to the FSP on 12 September 2011. However, the FSP continued with its recovery action after this time and unnecessarily entered default judgment against her on 27 September 2011 when it was already mortgagee in possession.
48.
The FSP says that, although it did obtain the default judgment, it subsequently filed consent orders to set the default judgment aside with no order as to costs.
49.
The Applicant’s loan was offered to her with associated Terms and Conditions (the Terms). The Terms state that the Applicant was required to pay the FSP’s expenses “ we reasonably incur in enforcing our rights under the contract or a security”. Therefore the FSP was entitled to pass on reasonable legal costs in accordance with the Terms.
50.
I have been provided with the FSP’s solicitors’ invoices for the work they performed in recovering the debt outstanding. The invoices total $7,938.73 including GST. I have also reviewed the Applicant’s loan account statements from 12 September 2011 when she handed over the property to the FSP. The total of enforcement costs incurred on the account since 12 September 2011 amounts to $14,956.87. However, the balance of the enforcement costs are sale expenses payable to the real estate agent.
51.
It does appear from the information that the FSP has passed on legal costs to the Applicant for the work performed by their solicitors in setting the judgment aside. I consider that the Applicant should not have to pay these costs as she had voluntarily handed over the property prior to the default judgment. There was no need for the FSP to proceed to default judgment in these circumstances.
52.
It is unclear whether the FSP has passed along GST costs incurred by third parties, namely its solicitors and the real estate agent to the Applicant.
53.
It is FOS’s view that a financial services provider is not entitled to recover any more than that which it is, or should reasonably be, out of pocket in enforcing its rights. Therefore, if a financial services provider is entitled to a credit from a third party, that credit should be accounted for in its claim for reimbursement from its customer.
54.
Therefore, FOS will take into account any entitlement the FSP would have to claim a Reduced Input Tax Credit (RITC) as allowed under the GST legislation on the costs incurred and passed on to its customer. This is because an entitlement to claim the RITC rests with the FSP as the entity which received the services eligible for a RITC; if the costs are passed on in total to the customer, the customer is not able to make a claim to the Australian Taxation Office (ATO) as the customer did not contract for the services supplied.
Case No: 313410
Determination
Page 8 of 10
55.
The solicitors’ invoices include GST of $666.82 which was payable by the FSP but it is unclear whether the GST was passed on to the Applicant. On the balance of the information and what is fair in the circumstances I consider this amount should be refunded to the Applicant.
56.
In summary, as it is difficult to ascertain the costs incurred by the Applicant in relation to the default judgment, I consider it is fair for the FSP to refund an amount of $1,000 to the Applicant for these costs. Together with the GST amount of $666.82 the FSP should refund $1,666.82 to the Applicant.
Non -financial loss 57.
FOS can award compensation for non- financial loss in appropriate circumstances where the applicant has suffered stress or inconvenience caused by an error of the financial services provider. The maximum amount we can award for non-financial loss is $3,000 for each claim. We will only award compensation for non-financial loss if there has been an unusual degree or extent of inconvenience.
58.
When assessing whether the circumstances are of an unusual nature we will review:
59.
The degree or extent of physical inconvenience suffered
The general time taken to resolve the dispute
The extent to which the financial services provider’s actions interfered with the applicant’s expectation of enjoyment or peace of mind.
In the circumstances, as the Applicant voluntarily surrendered the property to the FSP, it was unnecessary for the FSP to enter default judgment against her. I consider that the Applicant was subjected to some stress and anxiety when she was served with the default judgement after she had handed the property to the FSP for sale. I consider an award of $2,000 to be appropriate compensation for her non-financial loss.
Conclusion 60.
I consider that the FSP conducted the mortgagee sale process in accordance with its obligations to take all reasonable care to obtain market value and acted in good faith with due regard for the interests of the mortgagor.
61.
However, I consider that the FSP should refund an amount of $3,666.82 to the Applicant for legal costs, GST not reasonably i ncurred, and non-financial loss.
Case No: 313410
Determination
Page 9 of 10
Ombudsman’s Determination 62.
I have decided this case on its merits, having regard to the relevant law, good industry practice, codes of practice and previous FOS decisions. I have taken into account all the material submitted by the parties. I am satisfied that the documentation I have relied on has been provided to both parties.
63.
On the basis of the available information I determine that the FSP complied with its obligations as mortgagee in possession, and did account in a timely manner to the Applicant about the sale of the property and the proceeds of sale.
65.
I determine as follows:
The Applicant should ensure that the FSP has her correct details so that the FSP can provide her with the moneys due to her in accordance with this Determination - and due to her following the sale of the property.
Upon the Applicant’s acceptance of this Determination, the FSP should refund an amount of $3,666.82 to the Applicant (for legal costs, GST on expenses not reasonably incurred, and non-financial loss), and should also ensure that it pays her the separate and surplus funds of $84,347.70 (due to her from the sale of the property) - when it refunds her the amount of $3,666.82.
Case No: 313410
Determination
Page 10 of 10
