Bank gives green light, then red light to building loan

Hardship and financial difficulty,
Morgan owned land over which bank A had a mortgage. Morgan approached the bank about borrowing more to build a house. She said the bank later led her to believe her loan application would be approved, and on that basis she signed a building contract.
April 2016

When building work was already under way, the bank declined her application. Morgan borrowed money from family members to complete the house and got a $300,000 loan from bank B to repay them and bank A. However, the cost of the loan was higher than it would have been at bank A, and she struggled to make repayments. After accumulating significant debts, she complained to bank A that its actions had led to her financial hardship. Later, bank B sold the house at mortgagee sale, leaving a shortfall.

Our investigation

Bank A denied it had agreed to finance construction of her house because it did not formally process her loan application until several months after work began. However, we found that the bank increased her existing loan by $30,000 to pay the deposit to the builder, and this step was a reasonable basis for Morgan to believe the bank would lend the full amount she sought.

Morgan wanted bank A to relieve her of her debt to bank B. We did not consider bank A was responsible for all Morgan’s later debt, but we did recommend it compensate her for the significant inconvenience she had encountered, as well as for the expenses she would have incurred if she had reneged on the building contract after learning about her failed loan application. 

We recommended the bank pay $24,109 on top of an interim $10,000 payment it had already made. 


Morgan declined the offer, saying she intended seeking legal advice. 

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