Soon Maribel began to struggle financially. She was not getting the rental income she had expected and could not keep up with the bank repayments. Meanwhile, her other debts remained unpaid. The bank sold the properties at mortgagee sale. All three were sold with significant shortfalls. It appeared Maribel had paid well above their market value.

It later emerged Maribel had been the victim of a scam. The information the acquaintance had given to the bank to arrange the lending was incorrect. Maribel could not, in fact, afford the lending. 

Maribel had disclosed her various debts – including a home loan with another bank – on a lending application form provided to the bank for the first loan. An annotation to the form falsely claimed the debts were to be cleared following the sale of a family home. As a result, the debts were not included in the bank’s assessment of Maribel’s monthly expenses. The bank then relied on the information in that application form to approve the second and third loans. 

When approving the second and third loans, the bank recorded in its diary note system that Maribel was receiving weekly rental income “confirmed by account transactions”. However, there was no rental income and no statements showing such income. 

In approving the third loan, the bank obtained an account statement from Maribel’s other bank as proof of her deposit for the third property (the acquaintance having deposited funds in the account that were then withdrawn). The statement clearly showed Maribel had regular automatic payments going to other lenders. But these outgoings were not included in the bank’s loan assessment. Had they been, it would have been clear she lacked sufficient funds to make the loan payments.

Maribel complained to us that the bank failed to consider the loan applications properly, and that this failure led to the losses she had suffered. She wanted the bank to take responsibility for the shortfall from the sale of the properties.

Our investigation

The Code of Banking Practice requires a bank provides credit only when it has information showing the customer will be able to meet the terms of the lending. In this case, we were satisfied the information on the application form showed that Maribel could meet the terms of the first loan. While the information was false, the bank was entitled to rely on it as being correct when it approved the loan. There was nothing to suggest that the information was false or inaccurate. The annotation said proceeds from the sale of a family home would be used to clear debts. This arrangement – repaying debts after the sale of an asset – is far from unusual. Nor is it unusual for an agent to submit applications on behalf of a customer.

However, we considered the information available to the bank was not sufficient to show Maribel could afford the second and third loans because:

• The bank’s assessment included rental income, despite the fact there was no evidence of this income. 
• The bank’s assessment excluded external debts despite the fact these outgoings were shown on statements the bank reviewed. 
• The bank had relied on the information in the first loan application – but had not sought confirmation from Maribel that information was current. The second and third loans were only going to be affordable if the information about her income and outgoings remained unchanged.

Outcome

We recommended the bank write off the interest, fees and recovery costs associated with Maribel’s second and third loans. Maribel did not accept this, and the bank began debt recovery action.