We helped more than 6,000 low-income borrowers forced into crippling debt by an unfair government loans scheme.
HomeFund was a NSW Government home loans scheme, providing home loans to 57,000 low-income borrowers between 1986 and 1993. These loans had unusual features, including:
- fixed interest rates of 12% to 15.8% for 25 to 30 years,
- low initial repayments, too low to cover the interest accruing, which resulted in the loan balance ballooning for the first 10 years, and
- monthly repayments that were automatically increased by 6% each year (intended to eventually redress the ballooning debt problem).
Thirty-year mortgages were also aggressively marketed and sold to elderly people in social housing, despite it being obvious they had limited income and would never pay back the full loan amount.
When the economy slowed and commercial interest rates fell, Homefund borrowers were stuck with high fixed-interest loans.
Debt quickly ballooned, often exceeding the value of the homes as house prices were stable or declining in many areas where HomeFund borrowers had purchased. Some borrowers sold their home, but were left with significant debts due to the nature of the loan. And the automatic increases to repayments meant borrowers faced the prospect of increasingly unmanageable payments.
The Justice and Equity Centre (as PIAC) worked with financial counsellors, community legal centres and borrowers to bring HomeFund to public attention. We made submissions to several public inquiries into how the scheme had failed.
On Christmas Eve 1993, the NSW Government pushed through legislation restructuring HomeFund. These reforms did not help the most disadvantaged borrowers, with people most significantly in arrears facing foreclosure and loss of their home. It also stripped borrowers of their rights to sue the Government for breaching consumer protection laws and for the way the loans were sold. A HomeFund Commissioner was also established, who received over 8,000 complaints.
From 1994, we represented borrowers in two representative actions against the NSW Government and the private organisations involved in HomeFund. To prevent the NSW Government from avoiding responsibility by removing the rights of borrowers under state law, the cases were filed in the Federal Court under the Commonwealth Trade Practices Act.
We argued that the loans were unusual and dangerous making it unconscionable to sell them to low-income borrowers with little or no financial experience. We also argued the loans were sold to many borrowers using misleading and deceptive marketing material and oral statements.
The Federal Court identified preliminary questions of law, which were sent to the High Court. The High Court found the Government was not bound by the Trades Practices Act, but the liability of the private partners involved in the scheme could not be determined without a full hearing.
Subsequent negotiations with the NSW Government eventually led to a settlement, which took effect in April 2001. The settlement was a major win for the 3,700 borrowers who still had HomeFund loans, entitling them to interest rates dramatically lower than their contract rate. It also provided relief for 2,300 borrowers who had sold their home but were still repaying their loan. Their debts (collectively more than $75m) were waived and credit records amended.
Further reading
The Sydney Morning Herald, They queue for HomeFund, 18 April 1989
Australian Financial Review, NSW auditor slams Fanmac, 20 September 1993
Image: Daily Telegraph, 8 November 2000.
