Carolyn Flanagan told the royal commission on Monday that she did not receive legal advice prior to signing a guarantor contract with Westpac for her daughter’s business loan.
That’s despite the banking code of conduct requiring that lenders advise would-be guarantors to seek independent advice prior to agreeing. When her daughter’s loan fell into arrears, the bank sought to repossess her home, although ultimately agreed to defer the repayment until after Ms Flanagan’s death.
Ms Flanagan, who admitted her memory is vague, said, “I would have signed anything, love, for her [daughter], in hindsight.
“I have to be honest about that. If you can’t help your children, who can you help?”
Nevertheless, she was adamant that if she had been told to seek legal advice she would have “walked out of that bank and gone”.
Difficult to say no
Legal Aid NSW’s senior solicitor, Dana Beiglari, has been representing Ms Flanagan since she began receiving eviction notices. She told the commission Ms Flanagan’s situation was not uncommon.
“In our case work experience at Legal Aid, it’s generally older people, so older parents who are using their homes as security for business loans for the benefit of a third party, who’s usually a son or daughter,” she said.
“Those people come to us for advice at the point where the bank is threatening to sell their home.”
Ms Beiglari said her clients often cite familial pressures as triggers for both agreeing to becoming guarantor and for eschewing independent advice.
“It’s very rare for clients to understand that their Centrelink pension payments may be reduced or cut off completely if the guarantee is called upon, due to the effect of the gifting rules that Centrelink has, and finally, a significant implication is the emotional toll that the stress and stress that this may have on the family unit,” she said.
“It could cause a relationship breakdown between the parent and the child which can be devastating for a parent, particularly in their old age.”
Ms Beiglari said her clients often have limited recollection of the circumstances of the agreement, may have difficulty communicating.
“I would say that nearly all of the cases that I have seen at Legal Aid, the client did not understand the detail of the financial arrangement that they were signing up to,” she said.
‘Guarantors offering up their guarantee without understanding the risks’
Philip Khoury, the independent reviewer who conducted a review of the Code of Banking Practice in 2016 and 2017, told the commission loan guarantors can be victims of abuse.
As part of the review, Mr Khoury analysed the protections for guarantors and found there were large risks associated with the practice.
Responding to questioning around the particular issues raised, Mr Khoury said, “Really, guarantors offering up their guarantee without understanding the risks.
“In the extreme end, this could be a product of abuse, elder abuse, familial abuse. In fact, even the guidelines that the banks have put together for this alert bank staff to the possibility of coercion in obtaining guarantees for someone else’s loan. So, this was clearly an issue.”
He said it was clear some would-be guarantors were potentially getting themselves into “highly risky” positions as their goodwill blinded them to the risks and realities.