22/06/2017 - 11:21

Supreme Court upholds 53% loan charge

22/06/2017 - 11:21

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A Supreme Court dispute between West Perth firm Quantum Credit and a City Beach developer has shone a light on business practices at the risky end of the property finance market.

 

Supreme Court upholds 53% loan charge
Quantum Credit specialises in higher-risk short-term lending. Photo: Attila Csaszar

A Supreme Court dispute between West Perth firm Quantum Credit and a City Beach developer has shone a light on business practices at the risky end of the property finance market.

In 2014, Ross Love took out a loan from Quantum Credit for what was meant to be a short-term refinancing, but progressively increased the loan amount over the following eight months.

At the same time, he took out a further loan from Platinum Mortgage Securities, which is a wholly owned subsidiary of Quantum and operates from the same premises.

After Mr Love and his company, Love Properties, defaulted on the Quantum loan, the lender was granted summary judgement and the debt was subsequently repaid.

Mr Love contended that, following default, the interest rate increased from 9.75 per cent per annum to 53 per cent pa.

His counsel argued before the court that the interest charged was a penalty, or in effect a punishment.

Counsel argued Mr Love was entitled to restitution of monies wrongly paid to Quantum, on the basis these payments were excessive.

In a judgement handed down this week, Justice Katrina Banks-Smith disagreed, finding in favour of Quantum and upholding the amounts paid by Mr Love.

In her judgement, she noted Mr Love was an experienced businessman, a qualified accountant, held a reasonable size property portfolio and was no stranger to litigation.

The case had its origins in 2011, when Mr Love applied jointly with his neighbour to subdivide their properties in City Beach.

He entered agreements to buy part of the neighbour’s property and to sell the new sub-divided lot.

The planned deals were hit by a series of delays and Mr Love’s situation became more complicated in June 2013 when another lender, KWS Capital, lodged a caveat over three of his properties.

“By January 2014, Mr Love needed sufficient funds to satisfy the debt to the existing mortgagee, a debt to a second mortgagee, moneys due to the neighbours for the purchase of the 223 sqm and enough funds to be used as security to permit the KWS caveat to be lifted,” the Supreme Court judgement explained.

That’s when he started negotiating with Quantum Asset Management, which trades as Quantum Credit and is ultimately owned by South Africa’s FirstRand Bank.

The high cost of Quantum’s loans was spelt out in the judgement.

The interest rate for Mr Love started at an annual 9.75 per cent but increased to 3.43 per cent per month after the first four months (known as period B).

In the event of default, the latter rate would jump to 4.43 per cent per month – equivalent to 53.1 per cent pa.

Mr Love’s initial $245,000 loan also incurred sizeable fees – an establishment fee of $2,750, a security fee of $32,306 and a documentation fee of $4,785.

Mr Love subsequently increased the loan principal on three occasions to $418,000, and each time incurred further fees, amounting to $62,717.

The Quantum loan was secured by second registered mortgages over six of Mr Love’s properties.

Platinum’s loan, for $1.1 million, was secured by a first registered mortgage over Mr Love’s City Beach property and was not the subject of this dispute.

Quantum told the court that it targeted a rate of return across its portfolio of 36 per cent, which was justified by the risky nature of its borrowers.

In Mr Love’s case, the targeted annual return was substantially higher, at 53 per cent, as Mr Love’s credit report showed a very high risk of default, numerous court writs and default judgements.

Furthermore, his repayment plan involved the subdivision and sale of a property that was already subject to litigation.

Quantum explained that it sought a consistent return across the term of a loan – period A was through interest and fees while period B was through interest only.

“Quantum submits that once that model is properly understood, the 'uplift' between period A and period B is not real: in fact, the change in the agreed return to Quantum between period A (lower rate) and period B (higher rate) was from 52.68 per cent pa to 53.16 per cent pa,” the judgement said.

In her determination, Justice Banks-Smith said both parties were experienced and commercially sophisticated.

“The proposal for high fees and interest was disclosed for some months before the letter of offer was executed,” the judgement stated.

“Quantum has a strong case that the period B rates had a legitimate purpose of protecting Quantum's interests, were not out of proportion to that interest and cannot be said to only operate as a punishment.

“I consider that the defendants have no reasonable prospect of meeting their onus to establish otherwise. There is no real question to be tried.”

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