Restrictions no basis for keeping entire sale proceeds

Categories:
Lending restrictions, Freeing up capital
Summary:
Lee owned two properties funded through separate bank loans. When he sold property A, he thought he would repay the loan on it and keep the extra money. But the bank repaid the loan in full and used the remaining sale proceeds to reduce the other loan. When queried, the bank said it had to do this because Reserve Bank restrictions required the loan-to-value ratio on the remaining property to be less than 80 per cent.

Lee said the loan-to-value restrictions shouldn’t apply because the bank approved his lending before the restrictions were introduced. He wanted the bank to return the remaining sale proceeds.

Our investigation

When we questioned the bank's rationale for keeping all of the sale proceeds, it acknowledged it was incorrect to use the restriction as the reason, but it maintained it had the right to apply the sale proceeds to the other loan because both loans were secured by "all obligations" mortgages over the properties.

The terms and conditions of the loans did indeed give it that right. The bank said it was concerned that the loan-to-value ratio on property B was very high. It had used its commercial judgement to conclude that it needed to reduce the size of the remaining loan. We do not have the power to consider complaints about a bank’s commercial judgement and would have had to leave the matter there.

However, Lee asked the bank to reconsider its position if he could show that his remaining property had increased in value. This would lower the loan-to-value ratio. The bank agreed. It obtained a favourable valuation, but this was not favourable enough to justify returning the remaining sale proceeds. Instead, the bank proposed an equivalent loan to Lee.

Outcome

Lee was satisfied with this outcome, and the complaint was resolved.

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