Bank failed to check expenses before approving loan that proved to be unaffordable

Categories:

Advice & information, Bank decisions, Lending,

Summary:

In April 2023, Sheryl applied for a home loan of $343,400 through a mortgage broker. The bank approved the loan, and Sheryl bought a house the following month. From the outset, Sheryl found the loan unaffordable. She arranged for a boarder to pay $200 a week – income that the bank included in its affordability assessment and that was a condition of the loan – but the boarder did not move in. To keep up repayments, she borrowed $6,551 from friends and family members. Sheryl complained that the loan was unaffordable, but the bank said this was the case because she did not have rent from the boarder. Sheryl also complained that the broker misrepresented her financial position and gave her poor advice – advice the bank accepted when approving the loan.

Published:

June 2025

Our investigation

We looked at the income and expenses used by the bank in assessing whether Sheryl could afford the loan and found the bank failed to make reasonable inquiries into her expenses and ability to make repayments before approving the loan – a breach of the bank’s obligations under the Credit Contracts and Consumer Finance Act 2003. In particular, there was conflicting information provided by the broker about a tithe of $80 she made each week to her church. This expense should have been recorded on the application form but was not. A summary by the broker accompanying the form said the $80 payment would stop once she found a house, but Sheryl said she never agreed to stopping the payment, nor another one of $56 a month to a charity, which was also not included in the bank’s affordability assessment.

Even with the boarder’s rent, Sheryl’s income would have been tight. The $80 tithe was a big expense for her, and left her with a shortfall, which was compounded by the $56 donation each month – an outgoing that should have been included in the bank’s calculations. In short, the loan was unaffordable. The bank should have checked with Sheryl directly about her expenses because there were inconsistencies between the loan application she signed and the information about the tithe supplied by the broker.

The bank acknowledged that its lending had been irresponsible and that the loan was unaffordable. It offered to put $39,083 Sheryl had paid in interest, towards repaying the loan itself. It also offered to refix the loan at a lower interest rate, pay compensation of $9,000 for the stress she had suffered (which had affected her health and required her to engage a financial consultant) and reimburse the $250 application fee.