Case Notes
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Lending - mortgage - mistake in calculations - secured finance required for buying a section and building a house - bank overstated amount customers could afford to borrow - mistake discovered after purchase of section - shortfall in funds needed to build - misrepresentation by bank - calculation of compensation - factors to be taken into account in assessing loss - contributory fault by customers - inconvenience
Ms P and Mr R, a young couple, owned a house they had built. They found a section they liked on which they wanted to build a larger and better house.
Ms P went to the bank to check how much they could afford to borrow to buy the section and to build a house. A loan application was completed. The bank officer did some calculations and told him the bank would lend up to $435,000. Ms P thought that this sounded like a lot of money and questioned the amount with the bank officer. The bank officer told her that this figure was correct.
Ms P and Mr R decided to proceed. They sold their house, bought the section, moved in with R’s parents, and asked a draftsman to draw up plans for the new house.
A short time later Ms P and Mr R asked the bank for a small personal loan to cover some expenses. Ms P noticed that some of the figures on the loan application form filled in by the bank officer did not look right. It turned out that a mistake had been made and that the bank officer had used Mr R’s gross income details (rather than his net income).
The bank then recalculated the figures it had given to Ms P for the amount it could lend to build the house. It told her that, in fact, it could only lend a maximum of $325,000 – a $110,000 difference from the amount that she had been told about two months earlier. This meant that they did not have enough money to build the house they wanted on their section.
Ms P and Mr R complained without success to the bank, and then approached my office. They wanted the bank to compensate them by paying them $110,000, the difference between the amount that they had been told they could borrow and the amount that the bank was actually prepared to lend to them. The bank denied that its officer had told Ms P that it would definitely lend $435,000 and noted that no formal loan approval had been given. The bank no longer had the original housing loan application. This had been destroyed around the date of the draw-down of the personal loan.
I found that:
1. It was more probable than not that the bank had misrepresented to Ms P the amount of money she and Mr R could afford to borrow to build a house on the section that they wished to purchase.
I took into account:
• that the bank officer had used the wrong income figures for Mr R when completing the personal loan application. It was more likely than not that a similar error had been made in completing the housing loan application
• evidence from another bank that, based on Ms P’s net income and Mr R’s gross income, it would lend the couple a sum of $430,000 – a very similar figure to the amount that Ms P said she had been told by her bank
• statements from friends and family of Ms P who confirmed that she had told them that the bank had advised her that it would lend up to $435,000
• that the bank had destroyed the vital loan application before the complaint was made.
On the other hand, the bank had not produced any evidence in support of its position. It had simply said that the bank officer did not and could not have made a mistake.
2. Ms P and Mr R had relied on the bank officer’s advice when they made the decision to sell their existing home and to purchase the new section.
3. In order to assess compensation, I had to look at how much it would cost to put Ms P and Mr R back in the position in which they would have been, had the misrepresentation not occurred. This meant looking at how much Ms P and Mr R would now have to pay to buy a similar house to their previous one, as well as the costs they had paid so far and future costs they would have to pay.
I calculated Ms P and Mr R’s direct loss to be approximately $69,000.
However, I found that there had been some contributory fault on the part of Ms P in:
• not obtaining formal written approval from the bank for the total new borrowing proposed
• not questioning the bank more closely as to the affordability of a very large increase in total borrowing.
I assessed the level of contributory fault at 15%, reducing the amount of the direct loss to approximately $58,500.
I also found that Ms P and Mr R had suffered inconvenience as a result of the bank’s actions. The inconvenience included stress, embarrassment and disruption to financial planning. Their lives had been placed “on hold” for ten months after the discovery of the bank’s mistake, adding to their stress and placing a strain on their relationship. Given the level and duration of the inconvenience, I awarded the maximum compensation sum available of $6,000.
The case was eventually resolved on the basis I had recommended.