Court refuses to order removal of a credit default report

Trish Cassimatis & David McCrostie | June 2012 | Banking

The recent Supreme Court of New South Wales decision in Westpac Banking Corporation v Parker [2012] NSWSC 514 examines a borrower’s application to the Court for an order that their bank remove a credit default listing with a credit reporting agency.

Who does this impact?

Lenders who report facility defaults to credit reporting agencies and defaulting borrowers.

What action should be taken?

The lesson for the Bank in this case is to ensure that key local branch staff can easily identify files that are the subject of existing litigation so that when they do conduct meetings with their customers, the staff are able to tailor their communications and representations in a manner appropriate to the aggravated situation.

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Court refuses to order removal of a credit default report even when the default itself is the subject of contested proceedings

Background In May 2007 the Bank entered into a loan contract with the Parkers and in exchange obtained a mortgage over their property at Moss Vale.

In August 2011, the Parkers defaulted in their obligations pursuant to the loan contract by failing to make a scheduled payment. The Bank served a notice pursuant to section 57(2)(b) of the Real Property Act 1900 (the Notice) requiring the Parkers to rectify the default within 30 days.

The Notice was not complied with and the Bank commenced possession proceedings against the Parkers in January 2012, claiming $208,717.74, being the total amount outstanding under the loan agreement.

The Parkers defended the Bank’s proceedings on the basis that they paid the arrears, parts of the mortgage are unjust and that the proceedings should be stayed because the Parkers owed no money to the Bank.

Prior to the commencement of the possession proceedings, the Bank reported the Parkers’ failure to pay the total amount outstanding under the loan contract to a credit reporting agency. The Agency then created a document entitled “Consumer Credit Information” in respect of the Parkers (the Agency listing) and stated “this entry will be automatically removed from your file on 29/11/2016”.

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Despite the Parkers pleas to do so, the Bank would not agree to remove the Agency listing even though the arrears (but not the total amount) were paid.

Notice of Motion filed 5 April 2012 The Parkers filed a motion in the Bank’s possession proceedings seeking orders that the Bank do all things necessary to remove the Agency listing concerning the Parkers’ default.

The Parkers’ evidence established that: >> unless the Bank removed the Agency listing it would be difficult for them to refinance the mortgage and the cost of finance would be substantially higher >> they notified the Bank of their intention to refinance the mortgage in mid-March 2012 >> there had been a block on the transaction account linked to their mortgage which meant there could be no drawings to the mortgage >> the Parkers met with a local the Bank branch banker in late March 2012 and were advised that there appeared to be no arrears on the loan account and the mortgage instalments over the last 6 month period would be about $12,500 >> the Parkers set up a new transaction account and made payment of $12,500 to the account >> the Bank confirmed by (an automated) letter that the old transaction account would be replaced with the new transaction account for the purpose of the loan contract The Bank refused to the remove the Agency listing and advised that once the loan account was brought up to do date it would update the Agency listing to ‘current’.

Submissions The Parkers The Parkers’ relied on the Court’s inherent jurisdiction to grant the relief sought and also:

>> section 56 of the Civil Procedure Act 2005 which provides that the Court must assist in the facilitation of the just, quick and cheap resolution of the real issues in dispute in the proceedings >> the principles established in Legione v Hateley [1983] HCA 11; 152 CLR 406, in which the High Court held that it had jurisdiction to relieve a defaulting purchaser against the forfeiture of his interest in land even though he had failed to comply with a condition whereby time was of the essence >> section 18F of the Privacy Act 1988 which provides that a creditor must inform the credit reporting agency when an individual has ceased to be overdue in making the relevant payment to the creditor They argued that the Bank’s conduct in refusing to remove the Agency listing unless the principal amount was paid in full, was unconscionable in circumstances where:

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Court refuses to order removal of a credit default report even when the default itself is the subject of contested proceedings Trish Cassimatis & David McCrostie | June 2012

(a) the local Bank branch banker represented that there were no arrears (b) the Parkers paid 6 months’ mortgage payments in advance following the representation (c) the Parkers were no longer overdue in making the payment of the full amount of the principal

The Bank The Bank relied on evidence which established the default in compliance with the s 57(2) (b) notice and that the Agency report was not entered in error.

Further it submitted that: >> the Court did not have jurisdiction to make the orders sought in the motion based on the decision in National Australia Bank Limited v Thirup [2011] NSWSC 911 where his Honour commented that he did not think the Court could make any order in relation to the parties’ communications regarding Agency credit reports >> the motion did not have a sufficient relationship with the principal proceedings

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to allow the Court to grant it based on the decision in Rousseau Pty Ltd (in liq) v Jay-OBees Pty Ltd (in liq) [2004] where the primary proceedings concerned the winding up of Rousseau and its interlocutory application concerned the rectification of a deed

Decision Adamson J found the Bank regularly makes Agency listings similar to the listing the subject of the motion. His Honour agreed with the Bank that it should not be required to inform the Agency that the total amount of the principal is no longer owing unless and until it is repaid in full.

Significantly, his Honour refused to grant the relief sought because it would have the practical effect of determining the proceedings on a final basis. The Court could only grant the order for removal of the Agency listing if it first found that the Parkers did not owe the Bank any money.

That determination would be made on final hearing of the substantive proceedings, not on an interlocutory basis.

Although his Honour queried why the Bank would decide to act the way that it did (because the evidence established the existence of the Agency listing was hampering the Parkers’ refinance efforts), his Honour determined that he would not order the removal of the Agency listing.

Bank. On the information available, it seems the branch manager was unaware of the existence of the litigation or that both the Parkers and the Bank were legally represented.

The case serves as a timely reminder that large lending organisations must ensure that their senior branch staff is aware of the existence of legal proceedings between the lender and their borrowers. Preferably, borrowers in litigation with their lenders would have their files marked so as to minimise the risk that communication between the staff and the borrower jeopardises the lender’s position in the proceedings.

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Court refuses to order removal of a credit default report even when the default itself is the subject of contested proceedings Trish Cassimatis & David McCrostie | June 2012

For more information, please contact: Trish Cassimatis Lawyer T: 02 8257 5783 M: 0427 905 799 trish.cassimatis@turkslegal.com.au

Implications for lenders The decision provides some comfort to lenders that their usual practice of updating credit reports to ‘current’ when a customer has cleared the arrears on their account is the correct practice.

David McCrostie Partner T: 02 8257 5711 M: 0419 682 661 david.mccrostie@turkslegal.com.au

The Parkers’ made much of the fact that Bank’s local branch manager represented to them that there was no arrears and that the Parkers had made 6 months’ worth of mortgage payments in advance. In these circumstances, the Parkers contended, it was unconscionable for the Bank to not remove the Agency listing.

Whether the manager’s conduct gave foundation to the Parkers’ unconscionable conduct claim was not determined in this interlocutory application. However, the fact that the branch manager was in communication with the Parkers about the subject matter of the possession proceedings represents a significant risk for the

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