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Issue 21 - April 2015

Key Determination

 

An elderly woman (the borrower) went to a branch with her grandson to obtain a reverse mortgage. She obtained no benefit from the loan funds as the proceeds were paid away to the grandson. The borrower passed away two years later and the grandson’s Aunt, who was the executrix of the borrower’s Estate, lodged a dispute with FOS, claiming that the financial services provider (FSP) should not have provided the reverse mortgage.

FOS considered that the SEQUAL Code of Conduct (the Code) was the appropriate industry standard for reverse mortgages at the time the loan was granted. The Code set out obligations that the FSP must strictly follow when providing a reverse mortgage, including, the steps that the FSP must take to ensure that independent legal advice is obtained.

A reverse mortgage is a loan that allows a senior homeowner access to equity in their home. Generally reverse mortgages do not need regular repayments and interest and fees are added to the loan amount. The loans are intended to continue for the life of the borrower.

In this case FOS found that the FSP failed to meet the standards set by the Code because it could not demonstrate that the borrower obtained independent legal advice.

The relevant documents were not sent to a solicitor and the statutory declaration relating to legal advice did not name a solicitor. It could not be established the borrower made an independent decision to enter into the reverse mortgage as her grandson organised the interview with the financial adviser and accompanied her to each of the meetings with the FSP and the finance broker. In addition, the FSP accepted an instruction to pay the loan proceeds directly to the grandson as a “gift”, which was against its own policy of how the proceeds of a reverse mortgage should be used.

FOS concluded that the FSP should have considered the possibility that the borrower was unduly influenced by her grandson, who ultimately obtained the benefit of the loan. The FSP should also have interviewed the borrower separately from her grandson and insisted that she obtain independent and disinterested legal and financial advice without the grandson being present.

The FSP was required to pay the borrower’s estate the amount the estate paid to the FSP when the house was sold, plus interest on that amount, on the condition that the Estate co-operate in any action the FSP may take to recover the loan proceeds from the grandson.

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