Bank failed to assess loan application properly

Concerns about lending decisions,
Fabiana and her lodger applied for finance from the bank for a business venture. Fabiana had no history with the bank. The bank approved a loan of $45,000 and a revolving credit facility of $40,000. It also agreed to refinance her home loan from another bank. The lending was secured by a mortgage over her home and a personal guarantee from Fabiana for the business lending. The company was in Fabiana’s name.
February 2021

The lodger left New Zealand soon after he had drawn all of the $40,000 revolving credit. It appears the lodger had defrauded Fabiana and used all the money for his own benefit. Fabiana’s representatives raised concerns with the bank about its assessment of the lending application, saying she had no business experience, was from overseas and had limited English. They also said the bank did not check she understood the terms of the lending or consider that she was nearing retirement age and that the lending was unaffordable. 

Our investigation

We reviewed the information the bank received in support of the lending application. Despite getting a lot of documentation about the new business, much of it lacked useful detail. Further, the basis of the accountant’s projections for the new business were unclear.

We also surveyed other banks about their lending practices and asked one bank to complete a confidential review. We gave this bank detailed but anonymised information about the case to establish whether the bank’s lending assessment had been reasonable for a new business loan. The conclusion was that there was insufficient information to enable a prudent lender to make an informed decision on the application. 

After considering this information, the bank agreed it had not properly assessed the loan application and offered to reduce the lending by $45,000. 

We discussed the bank’s offer with Fabiana’s representatives, who initially considered the bank should write off the entire $85,000. However, we pointed out that Fabiana had taken legal advice about the lending, that she bore some responsibility for the situation, and that the bank had, in our view, made a fair and reasonable offer. 


Fabiana accepted the offer, and the bank also restructured the remaining business debt and home loan into one facility on a favourable interest rate. 

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