Debt woes brought on by also borrowing from other lenders

Categories:
Hardship and financial difficulty
Summary:
Jordan and Lee’s mortgage broker applied on their behalf to the bank for loan of between $325,000 and $350,000, to be repaid over 20 years. The loan was to buy a house, although they hadn’t yet found a property to buy. Jordan earned $95,000 a year and Lee had a small business. The bank declined the application because they didn’t have a big enough deposit.

A month later, Jordan and Lee found a property and put in a $295,000 offer. Their broker submitted another application to the bank, which agreed to lend $299,000 over 25 years. The loan had a low-equity premium of $4,000. 

A year later, Jordan and Lee applied for a $20,000 top-up to repay debt they had with other lenders. The bank approved the top-up. 

Two years later, Jordan and Lee moved to Australia, and rented the property. Over the next two years, they fell behind with repayments. They also ran up more debt with other lenders. The bank agreed to add that debt to their loan, but expressed concern at their continuing debt and suggested they get budgeting advice. 

After several years of keeping up repayments, Jordan and Lee decided to sell the property, but needed to renovate it using money from another lender. 

Jordan and Lee then told the bank they wanted to sell the property quickly, and asked for a loan repayment holiday because they couldn’t meet the next loan repayment. The bank didn’t offer loan repayment holidays, but said it was okay for the loan to go into arrears, to be repaid on the property’s sale. The bank asked for monthly updates so it could review the situation. 

Over the next few months, Jordan and Lee kept the bank updated. There was little interest in the property at the asking price so they lowered it. The bank said it would initiate a mortgagee sale at some point because they were not making loan repayments. The couple’s file was transferred to the bank’s debt recovery unit, which told them the bank remained willing to give them time to sell the property themselves, but couldn’t defer action indefinitely. 

Three months later, the property still hadn’t sold and the bank issued a payment of arrears demand. Jordan and Lee were upset because they felt they were doing all they could to sell.  The bank agreed to give them more time, but asked for a statement of their financial position. This revealed the couple had taken on more outside debt. 

After another four months, the couple's local council issued the bank with a demand notice for payment of their rates arrears. The bank paid the arrears, then issued them with a default notice under the Property Law Act 2007.

Jordan and Lee contacted the bank to say they had a potential buyer, who might make an offer the following month. They asked for a two-month extension to complete the sale. The bank agreed.

Jordan and Lee sold the property but at a price that left them with a debt of $40,000 to the bank.

Our investigation

Jordan and Lee complained to us that the bank shouldn’t have approved their $299,000 loan, given it had declined the first application because that loan was unaffordable. They also said the bank hadn't sufficiently considered their financial hardship when they were trying to sell and should have given them a loan repayment holiday, put the loan on an interest-only basis, or reduced the amount owed. 

We found that the bank’s assessment of Jordan and Lee’s ability to repay the loan was reasonable and in line with industry practice, based on the income and spending information they supplied to the bank. Also, the original application was for a higher amount over a shorter term. 

Nothing in the loan application raised any concerns with us about affordability. Jordan and Lee’s subsequent difficulties in meeting loan repayments appeared to be the result of borrowing more money from other lenders. 

We were also satisfied with the bank’s response to the couple’s financial hardship. We didn’t consider they met the eligibility requirements for hardship assistance in the Credit Contracts and Consumer Finance Act 2003. A debtor must suffer unforeseen hardship arising from illness, injury, loss of employment or some other reasonable cause. But even then, the Act does not oblige a bank to offer such a customer help. Rather, it obliges a bank to consider offering help. This help can be in the form of a mortgage repayment holiday or an extension to the term of the loan, or both.

In Jordan and Lee’s case, the bank refrained from taking debt recovery action for more than a year. This was, in effect, a loan repayment holiday – and a considerably longer one than banks usually extend to customers behind in their repayments.

Outcome

Jordan and Lee were unhappy with our findings and asked us to reconsider. We did so, and confirmed our initial findings. 

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