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Home loan – bank error – underfunding – Contractual Mistakes Act – negotiated settlement
Mr and Mrs T wished to purchase a section on which to build their home. They met with the bank and obtained a loan to finance the section purchase. Shortly afterwards they entered into a contract for the construction of their home. About six weeks later they applied for a loan to finance its construction. The application was successful, with Mr and Mrs T signing a loan agreement specifying monthly repayments of $1,444.72. This figure was queried with the bank, which confirmed that it was correct. It was not until approximately six months later that an error was discovered in the original loan documentation, and that the monthly repayments should have been $1,814.92.
Mr and Mrs T lodged a complaint with the bank, but when they were not satisfied with its response, the complaint was referred to me. During my investigation the bank accepted that it had made an error with the loan documentation. However, it considered that the correct information would have been disclosed to Mr and Mrs T when they first met with the bank. The bank was prepared to amalgamate Mr and Mrs T’s housing loan with another (high interest) loan they had taken to purchase a car, to extend the term of the loan, and to offer a low fixed interest rate for five years. It also offered a payment of $4,000 in compensation for inconvenience suffered as a result of the bank’s actions, as well as all legal costs incurred to date. As this offer did not bring the loan repayments down to $1,444.72 per month and Mr and Mrs T continued to be dissatisfied, my investigation continued.
I was satisfied that the bank could have sought relief under the Contractual Mistakes Act 1977, which would have meant substituting the accurate repayment figures for the inaccurate ones in the loan agreement. If Mr and Mrs T had, as they wished, continued to pay the lesser amount of $1,444.72 for the 25 year term of the loan, it would not cover all the interest due, and the amount owed would increase. Neither solution appeared satisfactory for both parties.
During the initial meetings between Mr and Mrs T and the bank officer the loan repayment figures mentioned were correct. When they embarked on the building process and before they saw the loan agreement with the inaccurate figures, Mr and Mrs T were satisfied that they could afford to service the debt. It was only later, after they had purchased a car financed by a loan, that the error in the loan agreement was discovered. Had Mr and Mrs T’s loan repayment amounts been correctly calculated, they would probably not have decided to buy a car, or would have bought a less expensive one. Moreover, once the bank became aware of the problem, it took six months to make a satisfactory settlement offer. Clearly, Mr and Mrs T had suffered a considerable degree of stress and disruption to their financial planning. I also bore in mind that they had benefited from the money advanced to them because, after all, they had the enjoyment of the home and car.
After having an opportunity to weigh all the factors together, I concluded that the bank’s offer was reasonable. After this, correspondence and meetings took place between my office, the bank and Mr and Mrs T. It was finally agreed that, in addition to compensation for the legal fees and inconvenience, the loans would be amalgamated and would be repaid over a 25-year term at an interest rate of 7.45%, fixed for the first five years. This meant that Mr and Mrs T’s total monthly repayments were only about $100 over their original budget. The bank was prepared to reduce them further by extending the term of the loan to 30 years, but as this would have meant the payment of more interest in the long term, Mr and Mrs T chose to accept the slightly higher monthly payments.
The case was closed on this basis