Is asset-based lending doomed in Victoria and Australia?

There appears to be a growing judicial trend to frown on asset-based lending, tending towards a policy requirement that lenders take appropriate steps to ensure that their loans will be serviceable.

Several New South Wales Court of Appeal decisions have held that asset-based lending in circumstances where a borrower has no possibility of repaying the loan may be unconscionable (see Elkofairi v Permanent Trustee Co Ltd (2003) 11 BPR 20,841; (2003) Aust Contract R 90-157; [2002] NSWCA 413; Perpetual Trustee Co Ltd v Khoshaba (2005) 14 BPR 26,639; [2006] NSWCA 41; and Kowalczuk v Accom Finance Pty Ltd (2008) 77 NSWLR 205; (2008) 252 ALR 55; (2008) 229 FLR 4; (2008) 14 BPR 26,565; [2008] NSWCA 343).

In Victoria, in Butler v Vavladelis [2012] VSC 186, the borrowers sought to set aside a judgment for possession of the security property on the basis that they had an arguable defence to the mortgagees' claim for possession of the property. Hargrave J in the Victorian Supreme Court rejected a defence based on an allegation that the borrowers' signatures on the mortgage were forged, because there was no evidence that the lenders were a party to any alleged forgery.

However, His Honour accepted the argument that asset-based lending (without the lender considering the borrower's ability to repay the loan) may amount to unconscionable conduct. On that basis, His Honour found that there was an arguable defence, and accordingly he set aside the judgment for possession (on certain conditions).

It seems odd that a defendant has no defence to a mortgagee's claim for possession based upon an allegation of fraud unless the fraud is committed by the mortgagee (consistent with many years of authority about indefeasibility of title), and yet can potentially defeat a mortgagee's claim for possession based upon what has until recently been viewed as legitimate lending practice.