HomeFund was a NSW Government sponsored home loans scheme which provided home loans to 57,000 low-income borrowers between 1986 and 1993. The loans had unusual features:
- Fixed interest rates of 12% to 15.8% for 25 to 30 years.
- Low initial repayments, in fact too low to cover the interest accruing on the amount borrowed. This resulted in the loan balance ballooning out for the first 10 years.
- Monthly repayments on the loans increased automatically by 6% each year. This was intended to eventually redress the ballooning debt problem.
When the economy slowed and inflation and commercial interest rates fell, the Homefund borrowers were stuck with high fixed-interest loans with annually increasing repayments and ballooning debt often exceeding the value of their homes. At the same time real wages were dropping and house prices in the areas where they had bought were either stable or falling.
PIAC worked with financial counsellors, other community legal centres and borrowers to bring the borrowers’ plight to public attention and made submissions to a number of public inquiries into what went wrong. The Government then pushed through legislation on Christmas Eve 1993 restructuring Homefund. This fell well short of meeting borrowers’ needs and, took away borrowers’ rights to sue for breaches of consumer protection and other laws in relation to the way the loans had been sold to them.
From 1994, PIAC acted in two representative actions for the borrowers. The State together with each of the private joint venturers involved in the implementation of Homefund were named as defendants. To avoid the statutory removal of rights under state law, litigation was commenced in the Federal Court seeking to rely on the Trade Practices Act 1972 (Cth). The central claims under the Trade Practices Act were that the loan product was so unusual and so dangerous that it was unconscionable to sell it to low-income borrowers who had little or no financial experience, and that both the written promotional material and the oral statements made to many borrowers, were misleading and deceptive.
Preliminary questions of law identified by the Federal Court eventually went to the High Court. It determined that the State, when acting through the Department of Housing, was not bound by the Trade Practices Act but found that whether the State’s private partners in Homefund got the benefit of that ‘immunity’ could not be determined in the absence of a full hearing.
Subsequent negotiations led to a settlement proposal being developed and notified to borrowers by letter and notices published in the major newspapers. The settlement was approved by the Federal Court on 19 March 2001 and took effect on 2 April 2001.
The main beneficiaries were the 3,700 borrowers who still had HomeFund loans. Those loans had fixed contractual interest rates as high as 15.8%. Under the settlement those 3,700 borrowers became entitled to reduced interest rates which, whilst remaining marginally above commercial rates, were dramatically less than their contract rate. In addition borrowers who had had their home sold up but still owed money on their loan due to the ballooning nature of the loan had that debt waived and their credit records amended. They numbered 2,300 and owed over $75 million. The case and settlement process were funded by Legal Aid.