Bank failed to consider whether customer could service lending before giving green light to sale

Concerns about lending decisions,
Alfred bought a section that he planned to subdivide and build two kitset houses on and rent out. Albert (his business and family trust) had current lending with the bank secured by mortgages over three properties as well as a guarantee. He did not seek funding from the bank for the purchase of the section.
February 2021

Alfred signed a contract to buy the kitset homes and several months later called the bank to ask whether it would allow him to keep the proceeds from one of the houses if he sold it. The bank said yes: his business and trust appeared to have enough equity in the three properties that were his security. Alfred went ahead and sold one property. At that point, the bank looked at his income – he had gone from a secure, well-paid job to a more uncertain, lesser-paid contracting role – and decided it had doubts about his ability to service the lending. It told him it would have to keep all the proceeds from the sale to reduce his overall lending.

In response, Alfred switched his business from the bank to a finance company and sought extra finance from it to complete construction. Alfred considered the bank had misled him and that he had suffered a direct loss of $50,000. This consisted of the higher costs of borrowing from the finance company, extra building costs caused by delays in refinancing, the loss of rental income on the kitset houses given the delays, and the loss of the capital gain on the property that was sold.

Alfred and the bank disputed what took place during the crucial phone call. The bank said it understood that he planned to sell one rental property and replace it with another. It agreed it could have done a better job answering his query that day, including looking into his ability to service his lending, but did not consider it was liable for all the claimed losses. It offered $3,000 in recognition of the stress Alfred had suffered. Alfred rejected the bank’s offer and asked us to investigate. 

Our investigation

The bank had no recording of the phone call, but we considered it reasonable for Alfred to rely on what he was told during the conversation and sell one of the houses. We could not consider the sale proceeds kept by the bank a direct loss because the bank was entitled to decline his request and keep the money – noting, of course, that Alfred did not “lose” these proceeds because the bank used them to reduce the amount of money he owed it. We did not consider the higher costs of borrowing a loss for which the bank was liable because he would have incurred these regardless of the bank’s actions.

We could, however, look at any losses he suffered as a result of receiving incorrect information about how much of the sales proceeds he could keep. Alfred produced evidence of extra costs of $2,500 resulting from building delays, which the bank agreed to pay. 


Alfred accepted the bank’s offer of $3,000 for stress and $2,500 for extra costs.

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