better banking

Case - 45526

2016 - 2017

Lending

Property lending

Mrs O had some small debts and was finding it hard to get ahead. An acquaintance at her church suggested the best way to improve her situation was to get a loan to buy an investment property and consolidate her debts. The acquaintance told her about an investment property on the market and arranged the lending with a bank. A month later the acquaintance said two more investment properties were available and again arranged the lending with the bank. 

Soon Mrs O began to struggle financially. She was not getting the rental income she had expected and could not keep up with the bank repayments. Meanwhile, her other debts remained unpaid. The bank sold the properties at mortgagee sale. All three were sold with significant shortfalls. It appeared Mrs O had paid well above their market value.

It later emerged Mrs O had been the victim of a scam. The information the acquaintance had given to the bank to arrange the lending was incorrect. Mrs O could not afford the lending.

Mrs O had disclosed her various debts – including a home loan with another bank – on a lending application form provided to the bank for the first loan. An annotation to the form falsely claimed the debts were to be cleared following the sale of a family home. As a result, the debts were not included in the bank’s assessment of Mrs O’s monthly expenses. The bank then relied on the information in that application form to approve the second and third loans.

When approving the second and third loans, the bank recorded in its diary note system that Mrs O was receiving weekly rental income “confirmed by account transactions”. However, there was no rental income and no statements showing such income. 

In approving the third loan, the bank obtained an account statement from Mrs O’s other bank as proof of her deposit for the third property (the acquaintance having deposited funds in the account that were then withdrawn). The statement clearly showed Mrs O had regular automatic payments going to other lenders. But these outgoings were not included in the bank’s loan assessment. Had they been, it would have been clear she lacked sufficient funds to make the loan payments.

Mrs O complained to us that the bank failed to consider the loan applications properly, and that this failure led to the losses she had suffered. She wanted the bank to take responsibility for the shortfall from the sale of the properties. 

The Code of Banking Practice requires a bank provides credit only when it has information showing the customer will be able to meet the terms of the lending. In this case, we were satisfied the information on the application form showed that Mrs O could meet the terms of the first loan. While the information was false, the bank was entitled to rely on it as being correct when it approved the loan.  There was nothing to suggest that the information was false or inaccurate.  The annotation said proceeds from the sale of a family home would be used to clear debts. This arrangement – repaying debts after the sale of an asset – is far from unusual. Nor is it unusual for an agent to submit applications on behalf of a customer.

However, we considered the information available to the bank was not sufficient to show Mrs O could afford the second and third loans because:

  • The bank’s assessment included rental income, despite the fact there was no evidence of this income.
  • The bank’s assessment excluded external debts despite the fact these outgoings were shown on statements the bank reviewed.
  • The bank had relied on the information in the first loan application – but had not sought confirmation from Mrs O that information was current.  The second and third loans were only going to be affordable if the information about her income and outgoings remained unchanged.

We recommended the bank write off the interest, fees and recovery costs associated with Mrs O’s second and third loans. Mrs O did not accept this, and the bank began debt recovery action.