Bank failed to make clear couple’s income factored into loan application

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Bank failed to make clear couple’s income factored into loan application

Categories:

Concerns about lending decisions,

Summary:

In December 2019, George approached the bank about a $300,000 loan to help his brother buy a house. His brother wanted to buy a house in a new development. He had a good income but was nearing retirement age. George asked the bank whether it could give him a loan, and he could pass on the funds to his brother, who would pay him back, and he, in turn, could pay the bank back. George was on national superannuation and his wife was a teacher. They still had a mortgage on their home, but no debt. They had shares, bonds and cash of about $500,000. The bank gave pre-approval for a $300,000 loan, valid until April 2020.

Published:

May 2022

George’s brother signed a contract with the developer. There were delays, and the pre-approval period expired. George notified the bank, which told him to contact it when the council issued a code of compliance certificate for his brother’s house. The council issued a certificate in February 2021, giving George’s brother 10 days to pay the developer. George approached the bank. After reassessing the application, the bank discovered George’s wife now worked only casually and declined to release the money, saying George and his wife no longer met affordability criteria for the loan. George spent a frantic week selling shares and bonds and freeing up cash so he could give his brother the required $300,000. Had he not, George’s brother would have lost his $50,000 deposit and the chance to buy the house.

George complained to the bank that it had never mentioned that his wife's income was crucial to the application. If it had made this clear, he would not have proceeded with the application. He said the situation had been very stressful, and he asked the bank to reconsider its decision, but the bank would not change its mind. George complained to us that the bank’s decision was unfair and had also disrupted the couple’s financial plans after they had been forced to sell many of their assets.

Our investigation

The bank followed standard practice in seeking information about George and his wife’s income, assets and expenses. However, it did not make clear the pre-approval was dependent on their income. We considered the bank had breached its obligation under the Code of Banking Practice to communicate clearly and effectively with George, something that was especially important in loan pre-approvals, which typically involve large sums of money and have far-reaching consequences for customers. We recommended the bank pay George $6,000 to compensate for their stress and anxiety, and also for the disruption to the couple’s financial planning, given the loss of a large portion of their income-generating assets.