The financial power mismatch

Personal Finance

Bank terms and conditions are where it is most obvious that your deal with them is not an equal balanced arrangement, even if it is in plain language

25th Sep 18, 3:34pm by David Chaston

When you take out a home loan - or any loan - the bank lends you the money in return for you agreeing to repay it.

In addition, you need to agree to pay interest on that money, and to pay the fees they charge.

But more than that, you need to sign the documents they present, prepared by them. And you have little or no chance of changing the terms and conditions in those documents.

This is a direct reflection of the mismatch in power between you as the borrower and the bank as the lender. The bank sets all the terms. Your only choices are to shop around for a better deal. But most shopping around involves just getting a better deal on the interest rate.

However what the bank requires of you is much more than that.

Here is an incomplete summary of how rights, obligations, and responsibilities fall in the terms and conditions from the largest New Zealand bank, ANZ.

How some key core home loan conditions apply

Can changes be made by … ?	The Bank	You
… for

Fixed interest rate	No	No
- at end of fixed rate period	reverts to floating rate	or negotiate a new fixed rate
		or break and pay to end contract
Floating interest rate	Yes, even without your consent	No
		or break and pay to end contract
Assign or transfer loan responsibilities/obligations	Yes, even without your consent	No, unless bank agrees
Require more security	Yes, even without your consent	n.a.
Hold the security	until repaid what you owe or might owe	n.a.
Change the terms and conditions	Yes, even without your consent	No
- including changing the term of the loan	Yes, even without your consent	yes, but only with bank's agreement
- Revolving credit termination	Anytime, even without your consent	No
	and don't have to give a reason	or break and pay to end contract
- Revolving credit limit decrease	Anytime, even without your consent	Yes
	and don't have to give a reason
Charge fees, or change fee rates	Yes, even without your consent	No
Recover costs from other caused by changes	Yes	No

All subject to the Code of Banking Practice and any relevant legislation like the Credit Contracts and Consumer Finance Act 2003. And the bank must act "fairly and reasonably" in its dealings and following industry guidelines and the law, even if they don't have to give you a reason for their actions.

The ANZ documents are here:
Loan summary
Standard home loan terms and conditions
Revolving credit terms and conditions

You do have one choice however; don't sign their canned agreement. But all that does in emphasise the mismatch in power between the lender and borrower. Obviously you should read and understand all documents you sign. But it is also true that you probably can't do anything about any term or condition you object to. "Reading and understanding" is probably of little help or point, other than to fully accept the submissive position you are in. After all, everyone does it because you have no practical choice - and making these legal documents easier to read and understand actually affects nothing.

We have used the ANZ documents in this story as an example. ANZ is New Zealand's largest bank with the most customers and sets the benchmark for banking relationships with clients. Similar arrangements apply with any other bank.

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

38 Comments

by kiwi_overseas | 25th Sep 18, 3:40pm 1537846805

Recourse mortgages should be banned.

by custard | 25th Sep 18, 5:35pm 1537853759

Yes - Would be interesting to see just how cavalier the banks were on residential property lending if non-recourse.

by Pragmatist | 25th Sep 18, 10:20pm 1537870839

Maybe we can get that one in after prices correct (however that happens).

Although, in the unintended consequences camp.. it would certainly encourage the demand side of property speculation.. "So if i take out a mortgage, and the property value goes up, I keep the highly leveraged profit.. but if the market tanks I just send the keys back and walk away?". Add in a bit of fraud (ie dodgy valuations and borrowed deposits) and it could backfire rather severely.

by custard | 25th Sep 18, 10:51pm 1537872719

As it did in the US - and yes, in the Southwest in particular.

Good point - would the AUS / NZ banks be that stupid - up until now I would have said no.

But having seen Westpac's carry on – now I simply don't know – I could only hope that more reasoned heads would prevail.

by Pragmatist | 26th Sep 18, 12:07am 1537877226

I point your attention to human nature.. If there are bank staff &/or brokers that have bonuses/commissions riding on lending volumes.. rules will be tested, pushed, stretched and eventually sidestepped.

by custard | 26th Sep 18, 9:28am 1537910902

Yes - I always keep this quote in the back of my mind - Charlie has been around a while and seems to have done alright:

Charlie Munger Quote: “Show me the incentive and I will show you the outcome.”

by HeavyG | 25th Sep 18, 8:37pm 1537864636

Why?

A lot of people wouldn't be given a loan then and those that were would pay higher interest rates.

by bw | 25th Sep 18, 8:47pm 1537865234

Interest rates could actually be ...lower! The Banks would compete for the better quality customers - that's how they make their money; lending - and to attract them, lower rates is the way to go.
Why do we think The Banks are lowering their rates now for 'new customers'? To improve the quality of their books. The 'bad stuff' will get left behind and any bank that is in that position could be the one to have to raise rates?

by custard | 25th Sep 18, 9:36pm 1537868191

HG - I think you may have missed the point.

A lot of people wouldn't be given a loan then - not necessarily.

Those that were would pay higher interest rates - again, not necessarily.

Think about the true underlying value of the security.

by HeavyG | 25th Sep 18, 10:13pm 1537870423

I think you don't know what you are talking about.

by Nic Johnson | 25th Sep 18, 10:15pm 1537870536

Ah the standard defensive response for 'you've lost me again, can we just talk about how houses always go up'

by HeavyG | 26th Sep 18, 11:00am 1537916423

Hard to argue with someone whose response is "not necessarily". It may work when you are in the playground arguing with 5 year olds but it won't cut in here.

by custard | 25th Sep 18, 10:32pm 1537871529

Apologies - but I actually do.

This thread will soon die - I look forward to your contribution in the future.

by HeavyG | 26th Sep 18, 10:48am 1537915702

Along with your stupid idea... Good riddance to both.

by Nic Johnson | 25th Sep 18, 3:57pm 1537847876

Thanks David,

I can envisage a frantic rush to the waste paper basket by all those who didn't read the small print on the mortgages they signed.

by Nzdan | 25th Sep 18, 4:45pm 1537850713

Would hate to end up like 70 year old John with his rental empire crumbling around him.

by Nic Johnson | 25th Sep 18, 8:01pm 1537862474

I once had some dealings with a Japanese businessman who had got himself in a bit of strife because his wife had found out that the 18 bedroom house he'd bought in the UK wasn't for her exclusive entertainment but was being shared by another female visitor that he liked to spend time with.

Mr X, we'll call him had bought this wonderful house for just over £10,000,000 in 2005 and had spent a cool £3,000,000 on doing it up a bit and getting the 18 acres of grounds manicured. Then in 2007 his wife busted him. In 2008 the house was on the market for £12,500,000. Not a whisper from the market. Price came down to £10,000,000 and in mid 2008 an offer of £8.5 million was turned down by Mr X. There was a bit of a mortgage on this place and my involvement began at the end of 2008. Anyway long and short of it is that in early 2010 with Mr X having lost control of the right to sell himself was relieved of the burden, the banks accepting a bid of £4.5 million (against their £5.25 million mortgage) to get shot of the whole thing. The moral of the story is that Mr X shouldn't have borrowed so much and probably shouldn't have got caught cheating on his wife.

by Hamish | 25th Sep 18, 4:55pm 1537851312

There could be the very rare occasion where the bank is rushing to the waste paper basket....
https://www.nasdaq.com/article/updated-russian-man-turns-tables-on-bank…

by Jock Silver | 25th Sep 18, 4:54pm 1537851273

Yes, the bank manager can do all these things, but the customer has the liberty to collect thumbs.

by murray86 | 25th Sep 18, 5:51pm 1537854708

It has never been a balanced arrangement. While the perspectve of this article is from the perspective of the borrower, try flipping the table. If you said to the bank that as a depositor here were your terms and conditions, and you laid out the same that they put into their mortgages, what do you think their response would be?

They will only loan to you if you provide them with security, but they will take your money, and be highly indignant if you demanded security. Definitely not balanced.

by Uninterested | 25th Sep 18, 6:34pm 1537857288

When you took the photo David, which arm was your one?

by Yvil | 25th Sep 18, 8:17pm 1537863470

LOL

by Jock Silver | 25th Sep 18, 8:53pm 1537865582

Clearly it was the big one. David is our god.

by MisterB | 25th Sep 18, 7:08pm 1537859288

Interesting table. Dont forget though there's all sorts of regs under responsible lending and credit contracts act that may make some bank terms unenforcable.

Question - what do you mean by "or break and pay to end contract" at the end of fixed terms or for floating loan. There's usually no cost to end contract (outside of refinance costs) ...

by bw | 25th Sep 18, 8:05pm 1537862753

I have been through this exercise recently and the futility of it doesn't surprise me!

(Me to the Commerce Commission) "I have been referred to your office by the Banking Ombudsman, as detailed in an email from them to me dated 31st May 2018, part of which reads:

“I note your comment that you believe the variation clause represents an unfair contract term. Unfair contracts are not a matter which is dealt with by our office. This issue falls under the jurisdiction of the Commerce Commission which oversees and enforces the Fair Trading Act 1986. You may wish to contact the Commerce Commission if you want to move forward on that particular point. "

(Commerce Commission to me) "We have now completed our assessment of the concerns you have raised and are writing to advise you that we will not be taking any action against (local bank) at this time.
We receive thousands of reports each year and though your report is important to us we cannot take action on every report. Each report we receive is assessed and an appropriate course of action recommended."

The Clause in the loan documentation that triggered my curiosity was:

"Changes to facility: Point 3.3 .The Bank may also amend the terms of this Agreement or Letter of Advice without having to obtain your further agreement. We will send you a confirmation of any changes at least 14 days before the relevant changes take effect"

My view is that I believe that such a clause is prejudicial to one party to the contract over the other; brings the certainty of the contract into question and that this should require that The Clause (and similar clauses) be struck out of the contract as a result.

by Yvil | 25th Sep 18, 8:20pm 1537863649

Loans are certainly not an equal agreement, I think the bank even has the right to recall a loan without giving much of a reason at all. The problem is, as a borrower, what choice do you have… pretty much none.

by bw | 25th Sep 18, 8:41pm 1537864882

Hence the reason for David's article. I believe similar complaints transpired across The Ditch, and in 2016 (?) their Banks ( our banks?) were required to remove Unfair Contract Terms from their documentation. My understanding is that they haven't done so here. That could level the playing field somewhat.

(PS: And you're right. Even if a borrower is in complete compliance with their loan documentation; is up to date on their payments etc, the loan can still be called in at the whim of the Bank. It rarely happens of course, but it can. The biggest concern might be the clause that says "We can take any offsetting funds and apply them to your outstanding loan at any time". Hint: Have your savings away from where you have your loans!)

by Jock Silver | 25th Sep 18, 9:03pm 1537866181

"We can take any offsetting funds and apply them to your outstanding loan at any time". Hint: Have your savings away from where you have your loans!

Hmmm... The bank might legitimately need to enact that clause in the event of an OBR.

by scarfie | 25th Sep 18, 9:21pm 1537867309

I would love to see "Fairly and Reasonably" tested when people, in aggregate, finally realise that the loan was created by virtue of their own signature.

by scarfie | 25th Sep 18, 9:23pm 1537867392

David, narrative can be powerful. I challenge you to change the narrative to something more accurate. Professor Richard Werner has shown the way by showing that banks don't lend money, they create securities.

by murray86 | 26th Sep 18, 8:25am 1537907106

Shift the narrative - good point; Banks create securities. Based on What? Initially, depositors funds (owned by the bank) and secondly money they have borrowed themselves. So digging deeper and looking at depositors funds; what ratio does the bank lend at, 10:1, 20:1? Taking the lower on (10:1) This will mean for every $1000 dollars they have deposited, they are able to loan out $10,000. Now let's look at interest rates; they offer around 3 - 4% (high end) on deposits, but charge around 4 - 5 % on loans. So for that $1000 they are paying $40, but they are getting around $500, by using it as the basis of the securities they issue. Yup definitely not balanced.

by scarfie | 26th Sep 18, 8:52am 1537908758

The security is made by the borrowers signature on a mortgage contract. Somebody signing up to pay for debt is the most important aspect of banking today.

by Averageman | 26th Sep 18, 7:28am 1537903734

One sided indeed. Is anyone suprised?

Regarding options. One can work, earn money and pay tax, and use savings to purchase. Of course the tax treatment and debt based bubble prices make that harder than being enslaved by the bank on its terms. Probably just the way the banks like it.

by Nzdan | 26th Sep 18, 7:38am 1537904283

People still took out mortgages when house prices were 3 x their income, today the deposit alone can be 3 x a person's income.

by bw | 26th Sep 18, 7:48am 1537904934

Yes. And 'back then' Banks were prohibited by law from lending more than ~30% of the main income earners salary - the likelihood of a family coming into the equation was considered etc. Banks could, of course, but if 'problems' occurred down the line then the bank could be done for Predatory Lending.
"~30% Deposit; >30% Serviceability and ~30% Loan to Value". Seemed to work ok!

by Squishy | 26th Sep 18, 7:46am 1537904796

That fixed interest rate expiry is an odd quirk of home loans, I suspect put in because banks prefer their lackadaisical customers on a higher margin floating interest rate (what is "fair and equitable" again?) From annual renewals of insurance to Netflix subscriptions the default option is renewal...but not home loans. Looks like an obvious swindle to me - and there are numerous others I can easily identify to maximise the rate of separating customers from their hard earned.

by bw | 26th Sep 18, 7:51am 1537905095

"Floating" is just Fixed Rate that expires - every day! At least with, say, 5 years Fixed, a customer can put of an inquest into their actual finances until the maturity date (in theory!), But Floating? A bank can review your circumstances, and act accordingly, on any given day....

by moneyphobe | 26th Sep 18, 8:54am 1537908870

Is this a watershed moment for all the mortgage owners suddenly realizing banks can call the loan in at any time?
- including changing the term of the loan Yes, even without your consent

The reason the terms are so bad in the banks favor is that they have a monopoly on debt creation.