ASIC sues Oak Capital alleging unconscionable conduct designed to avoid the National Credit Code

6 November 2024

The Australian Securities and Investments Commission (ASIC) has launched legal proceedings against Oak Capital Mortgage Fund Ltd and Oak Capital Wholesale Fund Pty Ltd (Oak Capital) – two non-bank lenders within the Oak Capital corporate group – alleging they engaged in predatory lending practices and unconscionable conduct designed to avoid the National Credit Code.

In its Concise Statement filed with the Federal Court of Australia, ASIC alleges that:

• Oak Capital engaged in unconscionable conduct in contravention of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) by implementing and maintaining systems for the purpose of avoiding regulation by the National Credit Code (NCC) in providing loans to consumers, and
• between March 2019 and October 2023 (RelevantPeriod), Oak Capital provided up to 47 loans, totalling more than $37 million. Each of these loans were secured by residential properties and either should, or likely should, have only been made subject to the application of the NCC or should not have been made at all. As a result:
  • loan applicants were deprived of the protection of the National Consumer Credit Protection Act 2010, the NCC and other consumer protection legislation,
  • Oak Capital avoided appropriate accountability and gained situational power, particularly for loans in default,
  • Oak Capital charged exorbitant fees and interest, exceeding $3.3 million in interest and $2 million in fees, and
  • some borrowers who managed to discharge their loans were worse off. Others who could not afford to repay their loans, lost everything Additionally, the Oak Parties charged exorbitant fees and interest, exceeding $3.3 million in interest and $2 million in fees.

How did Oak Capital structure its loans?

Based on information produced by ASIC, the loans made by Oak Capital during the Relevant Period were always structured as follows:

• A company was named as the ‘borrower’
• One or more individuals (typically the director(s) of the company and/or the registered proprietor of the security property) was named as ‘guarantor(s)’. This was a requirement even in circumstances where the named company borrower had no discernible interest in the subject of the transaction, was not trading, had no assets or had only been established days before applying for, or obtaining, the loan
• The average quantum advanced was approximately $790,000
• The loans were short term, typically around 12 months and no longer than 24 months
• They were subject to high interest rates, which were an average of 11.60% at the lower rate, and an average of 23.22% at the higher rate
• There were high associated fees ranging from 2.2% to 50.1% of the principal amount advanced
• The loans were interest-only. Many loans were made with interest pre-paid or capitalised, such that during all or part of the loan term, no recurring interest payments were required. In all cases, the total amount of the loan was due at the expiration of the loan term
• The loans were secured against real property, usually registered in the name of the guarantor
• The loans were referred and arranged by brokers — Oak Capital rarely dealt directly with a loan applicant

ASIC comments

ASIC Deputy Chair Sarah Court said,

‘As a result of loans being treated as unregulated, we allege Oak Capital deprived its clients of important consumer protections, including responsible lending obligations, the right to make a hardship application and protection from being charged excessive fees and interest.

‘These protections are critical in the current financial climate where borrowers are more likely to be at risk of serious financial hardship. ASIC will continue to take action where we consider business practices are designed to avoid consumer credit protections.’

What relief is being sought by ASIC?

In its Concise Statement filed with the Federal Court of Australia, ASIC is seeking declarations, injunctions, orders that certain contractual provisions are void, pecuniary penalties, publicity orders and ancillary orders against Oak Capital.

What can we learn from these proceedings?

Whilst these proceedings are ongoing and the Federal Court is yet to make a determination on the allegations made by ASIC, there are some immediate lessons for lenders.  

1. Transparent lending practices: Structuring loans to avoid regulatory oversight can harm consumers and lead to legal action. Lenders should maintain transparency in their lending practices and ensure that loans are issued in a manner that reflects the true nature of the transaction.
2. Adherence to Consumer Protection Laws: ASIC is continuing to crack down on predatory lending practices. Avoiding consumer protection laws can lead to significant legal consequences. Lenders should ensure their lending practices comply with responsible lending obligations and other consumer protections.
3. Risk management: Lenders should assess the financial stability of borrowers and avoid practices that could lead to borrower defaults and subsequent repossessions, which can damage both the lender’s reputation and financial standing.

If you are a lender and looking to review your processes or policies as result of these ASIC proceedings, please get in touch with us.