Foundations of Law
Introduction
This paper entails legal problem solving by applying the IRAC technique. The analysis focuses on a case involving reverse mortgage in Australia.
Part 1
Problem solving
Senior citizens who possess outright home ownership have an opportunity to access credit finance through the reverse mortgage plan. The reverse mortgage plans provide the homeowners an opportunity to secure credit finance against their home’s equity[1]. However, the reverse mortgage plan presents diverse risks to the homeowners because the plan is operationalised at a vulnerable time of the homeowner.
As an outright homeowner, Barry seeks extra finance from Shark Finance through a reverse mortgage plan developed by the institution. Under the reverse mortgage plan, the value of Barry’s house would be used as the security of the loan with no requirement for repayments. Shark Finance would recoup the loan issued and the accumulated interest by selling the house after Barry’s death or in the event that he moves into a nursing home. However, the financial crisis led to a downturn within the real estate sector. Subsequently, the value of the house declining forcing Shark Finance to requires Barry to make additional payments to cater for the loss of value contrary to the initial agreement. Due to financial constraint, Barry was not able to make the payments hence forcing the lender to increase the loan on interest and other administration fee. The high value of the loan on interest and administration fee compared to the predetermined home equity meant that Barry would be forced out of his house within a short period hence ending up homeless.
In applying for the reverse mortgage, one of the Shark Finance officers had encouraged Barry to exaggerate the value of his income and the valuation of his home’s equity in order to access a high mortgage. Shark did not examine the reliability of the information contained in the reverse mortgage application documents. Due to lack of financial and legal advice, Barry had resorted in selling a number of his family homes.
The case underlines the prevalence of financial abuse and unethical practices amongst the mortgage brokers, whereby the broker knows the actual value of the home but deceives the home owner to engage in misrepresentation of facts. This action amounts to unconscionable conduct. According to Section 8 of the Victoria’s Fair Trading Act of 1999[2], a person or business must not engage in unconscionable conduct in undertaking commerce or trade or offering goods and services[3]. The standard further affirms that businesses should not exert undue pressure or influence in the quest to enter into a contract to supply the requisite goods or services. In the Director of Consumer Affairs Victoria v Scully (2013) 303 ALR 168[4], the court ruled that ‘the intentional breach or reckless disregard of certain norms or standards amounts to statutory unconstitutionality[5].
The case further documents the lenders’ engagement in conscious provision of misleading information and incomplete information regarding the impact of inability to repay the loan using the home equity. This underlines the existence of a high degree of self-interest within the mortgage broker. In a case involving Violet Home Loans Pty Limited v Schmidt, the court ruled that the Violet Home Loans Australia Pty Limited , reverse mortgage provider acted unconscionably by providing the client with fraudulent loan application information. In making judgement on the Violet Home case, the court ruled that the organisation acted unconscionably by contravening the 2001 s12CB of the Australian and Investment Act[6]. In seeking credit finance from reverse mortgage firms, it is imperative for borrowers to consider developing adequate understanding on the inherent characteristics associating with the financing plan.
Moreover, it is imperative for the borrower to undertake due diligence in identifying the institution to seek reverse mortgage finance from. The rationale of undertaking due diligence is to identify the credible credit financiers. This aspect will play a critical role in safeguarding the borrower from the risk associated with seeking financial advice from unregulated advisors. The outcome of this move is effective cautioning of the borrower against fraudsters. Traditionally, the Australian market was characterised with increase in the number of unlicensed mortgage brokers, which increased the likelihood of misrepresentation of facts by the mortgage brokers.
In addition to the above aspects, it is imperative for the borrowers to be well versed understanding on the inherent characteristics or terms of the mortgage. Despite the fact that the borrower and the mortgage service provider might have entered into a formal reverse mortgage contract, the reverse mortgage cautions the borrower from the negative effect of economic crisis on the home equity. Nevertheless, in this case, the Shark Finance did not caution the borrower from economic crisis. On the contrary, the firm revised the terms of the reverse mortgage in an effort to cover the loss of value on the client’s home due to the occurrence of the financial crisis. Australia, has established the concept of negative equity as one of the legal foundations of reverse mortgage. However, due to self interest, Shark Finance did not implement the negative equity element in entering into a contractual agreement with Barry.
To minimise the likelihood of becoming homeless, Barry should consider undertaking extensive due diligence prior to making decisions regarding financing such as reverse mortgage. In seeking diligence, Barry should have considered focusing on understanding the terms and conditions of the reverse mortgage plan. Barry should have sought to understand the possible changes on the contractual agreement due to economic changes. On the other hand, the reverse mortgage finance providers should avoid engaging in conscionable conduct and misrepresentation of the requisite information for their self interest.
Part 2
Research strategy
To provide relevant legal advice to Barry on the issue faced, a comprehensive research strategy will be applied. The strategy will be comprised of a number of stages as examined herein.
The first stage will entail undertaking a study on the case issue presented by the client. This will aid in identifying the facts inherent in the issue. Consequently, it will be possible to frame the legal issues associated with the case. This stage would further entail evaluation of the additional issues that should be learned in order to effectively address the legal issue. Additionally, the primary law that might have been provided in the case study will be taken into account. In this case, the primary law applicable in Barry’s case relate to the Director of Consumer Affairs Victoria v Scully. On the basis of the issues identified, a number of search terms will be generated. This will form the foundation on which research from different materials such as journals and books is undertaken.
The second stage would entail identification of the relevant jurisdiction. The rationale of identifying the jurisdiction arises from the fact that laws vary from one jurisdiction to the other. Therefore, identification of the jurisdiction would ensure that the legal advice provided is aligned with prevailing legal statues.
The third stage would entail developing a comprehensive overview of the issue. This will entail conducting research from available print and web sources. Other cases which have applied the legislation in Australia will be considered. This will aid in gathering adequate insight on the issue faced. The web sources will entail focusing on credible online search engines such as Google and databases. Some of the databases and online libraries that would be considered in undertaking case research include UTS Library, Austlli website and LexisNexis. On the other hand, print sources will entail taking into account the legal dictionaries. The use of secondary sources such as treatises, legal encyclopaedias, Australian Law Reports, and restatements will aid in identification on the application of primary law relating to the case under evaluation. The importance of undertaking secondary sources arises from the fact that it will be possible to explain the inherent legal principles associated with the case. The secondary sources will aid in learning the critical foundations associated with a particular legal aspects and in the identification of the relevant statutes and cases. Consequently, more insight will be gained from the statutory cases. This approach will play a critical role in strengthening the reliability of the legal advice provided.
On the basis of the findings obtained from the secondary and primary sources, an analysis of the controlling law will be undertaken. This will involve actual reading of the law and determining the degree to which the law it is relevant and binding to the case study. The findings on the law will be applied to the facts identified from the identification and analysis of the issue faced. The last stage will entail ensuring that the law identified is good law.
Conclusion
The application of the IRAC technique and the proposed research strategy will improve the capacity in providing credible and relevant legal advice to clients. The research strategy will ensure that the legal advice provided is founded on law and rulings on past cases. Therefore, the strategy will contribute to acquisition of the critical skills in the legal environment.
Works Cited
Bant, Elsie. ‘Statutory and common law; interaction and influences in light of coherence’.
NSW Journal, 38.1 (2015), 367-390.
Burns, Fiona. The evolving statutory regulations of reverse mortgages in Australia’s risk
society. Sydney: University of Sydney, 2012. Print.
Black, Paul. “Reverse mortgage and current financial crisis”. 3 May 2012. Web. 16 May
- <https://www.naela.org/Public/Library/Resource_Database/Topics/11_Housing_Continuum/11c_Home_Foreclosures/Journal_Spring_2012_Black.aspx>
Director of Consumer Affairs Victoria v Scully (2013), 303 ALR 168. 23
Oct. 2013. Web. 16 May 2016.
<https://jade.io/article/274756 >
Fair Trading Act 1999. 1 April 2010. Web. 17 May 2016.
<http://www.legislation.vic.gov.au/Domino/Web_Notes/LDMS/LTObject_Store/LTObjSt2.nsf/DDE300B846EED9C7CA257616000A3571/2E63A649D6018697CA257761001FB75D/$FILE/99-16a044.pdf >
No. 16 of 1999 Morandin, Nicole and Joshua, Smith. ‘Australian competition and consumer
legislation 2011’. Sydney: CCH Australia, 2011. Print.
Reifner, Udo et al. Equity release schemes in the European Union. London: Nordestedt
Books on Demand, 2010. Print.
Thampapillai, Dilan et al. Australian commercial law. Cambridge: Cambridge University
Press, 2009. Print.
[1] Udo, Reifner et al. Equity release schemes in the European Union. London: Nordestedt Books on Demand, 2010. Print.
[2] Fair Trading Act 1999 , No. 16 of 1999
[3] Nicole, Morandin and Joshua, Smith. ‘Australian competition and consumer legislation 2011’. Sydney: CCH Australia, 2011. Print.
[4] Director of Consumer Affairs Victoria v Scully, (2013); 303 ALR 168
[5] Elsie, Bant. ‘Statutory and common law; interaction and influences in light of coherence’. NSW Journal, 38.1 (2015), 367-390.
[6] Dilan, Thampapillai et al. Australian commercial law. Cambridge: Cambridge University Press, 2009. Print.