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ombudsman news

issue 59

January/February 2007

banking: a selection of recent case studies involving lending

A significant number of the banking and credit-related complaints we receive focus on lending. Underlying many of these disputes, whether they involve personal or small business lending, is the complaint that:

  • the lender's decision not to provide credit was unfair or
  • the lender provided a loan or credit when it should have realised the customer could not afford to pay the money back.

When considering customer complaints, lenders may find it useful to bear in mind the following general points, based on common themes that run through many of the cases we see.

  • Obtaining information about a customer's financial position is not always the same as properly assessing the customer's ability to meet their potential repayments.
  • Customers who are known to be vulnerable (for example, those with learning difficulties or debt problems) may put particular trust in the lender. This may place a greater than normal duty on the lender to act responsibly.
  • Lending for a particular purchase or venture is not normally considered by us to be 'encouragement' by the lender - but this can change in certain circumstances.
  • It is very helpful if lenders keep good internal records. However, such notes do not replace the need for clear communication with the customer.
  • Lenders are not obliged to provide "running-account credit" (such as an overdraft), but they must act fairly when withdrawing a facility while the customer is making use of it.

case studies

banking: a selection of recent case studies involving lending

The following case studies represent a typical selection of the complaints about lending referred to us in recent months.

59/1
customers complained that after asking their lender for help with their debts, they ended up in a worse situation

Mr and Mrs A both worked in a local factory, earning modest wages. They were using the overdraft facility on their current account to its full extent. They also had a personal loan from their bank and had borrowed from various credit card companies.

In March 2004, realising they were in financial difficulty but unsure what to do about it, they visited their bank. They explained their situation to the lending officer, who told them the bank could give them a consolidation loan to cover all their existing debts.

Mr and Mrs A were pleased with this suggestion and they took out the loan, which paid off all their existing debts and returned their current account into credit. But the bank left the couple's overdraft facility in place on their current account, and within a couple of months Mr and Mrs A had begun to go overdrawn again.

In June, having found they were unable to keep within the overdraft limit, Mr and Mrs A visited the bank to discuss the position. The bank's lending officer arranged another consolidation loan for them, to cover the overdraft debt.

Again, the bank left the couple's overdraft facility in place, and within a few months Mr and Mrs A were again in financial difficulties. When they visited the bank in November they were given a third loan. This covered the debts that the couple had acquired since taking out the consolidation loan in June. It also covered an additional £500. The bank agreed to lend them this because they had said they were worried about how they would pay for all the "extras" they would need over the Christmas period.

By early 2005, realising that they were unable to meet their repayment commitments, Mr and Mrs A complained to the bank. They said they had asked for help in managing their debts but - instead - it had made their situation worse.

complaint resolved informally
We considered the bank's initial offer of a consolidation loan to have been helpful, as it re-financed Mr and Mrs A's existing debts into one lower-rate loan. At this point, the loan had been affordable.

However, we were concerned about the bank's response when the couple returned in June to discuss their continuing financial difficulties. The bank had interpreted the approach as a request to borrow more money. But, as the couple's testimony made clear, what they were really looking for (and what they thought they were being given) was guidance on how best to get themselves out of debt.

Mr and Mrs A thought that taking a further loan must be the best way of tackling the situation, since it had been suggested by the bank. It hadn't occurred to the couple to seek advice from anyone else on other ways of dealing with their predicament.

In our view, the bank should have made it much clearer that it was not in a position to advise the couple about their debts. Under the Banking Code, it should also have made them aware of organisations that were able to offer debt advice, free of charge.

We were particularly concerned about the bank's actions in providing Mr and Mrs A with an additional loan in November. It should have been perfectly clear from the bank's knowledge of the couple's income and outgoings that they could not afford the repayments for this further loan.

Mr and Mrs A readily agreed that they should bear some responsibility for their borrowing. We were able to settle the dispute by obtaining the bank's agreement to:

  • reduce the couple's debt to its pre-November level
  • deduct £250, in recognition of the distress and inconvenience caused by its poor response to Mr and Mrs A's request for advice
  • refund any bank charges caused by the strain of November's loan repayments and
  • accept repayment of Mr and Mrs A's remaining debt in affordable (interest-free) instalments.

59/2
bank accused of "irresponsible lending" when it gives a loan to a student so he can buy a motorbike

A 20-year old university student, Mr D, lived at home and worked full-time in a local supermarket during the vacations. He had a part-time job at the same supermarket during term-time.

Mr D applied successfully to his bank for a loan of £2,500, in order to buy and insure a second-hand motorbike. But as soon as he told his mother about the loan, she complained to the bank. She said its decision to lend her son the money had been "ill-judged and irresponsible" and that it had taken advantage of her son's inexperience.

Mrs D told the bank that her son had planned to go travelling for a year after he graduated. She was concerned that the loan repayments would not only prevent him from saving money for his travels, but also leave him short of cash. She also believed that, by lending him the money, the bank had actively encouraged her son to buy a powerful motorbike.

Mrs D thought the bank should write-off the loan and take the motorbike in exchange. The bank disagreed, so - with her son's knowledge and agreement - Mrs D brought the dispute to us on his behalf.

complaint rejected
It was clear that Mrs D wanted us to take a public position on the issue of lending to young people. We explained that we could not do that, as our role is simply to help resolve individual disputes.

When we looked into the details of this case, it was clear that the bank had made a proper assessment of Mr D's financial position before agreeing to lend him the money. We agreed with the bank's view that Mr D's regular employment and low outgoings meant he could easily afford the repayments.

We did not accept Mrs D's opinion that the lender had taken advantage of her son. He was an intelligent young man who clearly understood the commitment involved in a loan. Mr D had already decided to buy the motorbike before he approached the bank and the lender had no duty - or reason - to discourage him. There were no grounds on which we could fairly make the lender write-off the loan in exchange for the motorbike. We rejected the complaint.

59/3
lender gives loan to vulnerable customer who was unlikely to be able to meet the repayments

Mr J was a young, single man with some learning difficulties. He lived independently but relied on his family and his community support worker, Mrs Y, for help in managing his finances.

Mr J had only been in work for a few months - as a warehouse assistant - when the factory that employed him closed down. He realised there was no real likelihood of finding immediate employment, so he decided to start his own business as a handyman. He approached his bank and asked for a loan in order to buy a small van and some tools.

As his literacy skills were limited, Mr J had not prepared any kind of business plan. However, the lending officer told him this would not be necessary and that the computer showed he was "good for the credit". So the bank gave Mr J £4,000 as a personal loan.

Excited by the prospect of his new venture, Mr J went ahead and bought a small second-hand van and some tools.

Unfortunately, however, he was unable to find any work as a handyman. His current account quickly became overdrawn and he was unable to meet the loan repayments. Without any prior discussion with Mr J, the bank passed his details to its debt recovery section, who in due course wrote to him.

Extremely alarmed by the tone and content of this letter, Mr J panicked. Within a couple of days he had managed to sell his van - at a significant loss - to try and pay back some of what he owed.

Mr J then asked his community support worker, Mrs Y, for advice. With Mr J's consent, she complained on his behalf to the bank, saying it should not have lent the money in the first place. When the bank refused to uphold the complaint, Mrs Y referred it to us.

complaint upheld
We were satisfied that the lending officer was fully aware that Mr J had only a limited understanding of financial matters. Mr J had relied on the lending officer and believed that being told he was "good for the credit" was an assurance that he could afford the loan. We agreed with Mrs Y that, in the circumstances, it was reasonable for Mr J to have believed the lender was encouraging him to take the loan and set up in business.

Mr J had made it clear when he asked for the loan that his only income came from state benefits. He had no savings or other assets to fall back on, and had not been working for long enough to be entitled to any redundancy payment.

When discussing the possibility of the loan, Mr J had freely admitted to the bank's lending officer that he had no relevant skills or experience as a handyman - and had not given any thought to how he would obtain work.

It was clear that the lending officer had gathered information about Mr J's financial position and his reason for seeking a loan. But there was nothing to suggest that he had considered how Mr J would afford the repayments. We found it difficult to see how any reasonable lender, faced with the same facts, would have agreed to the loan.

We upheld the complaint and told the bank to:

  • write-off the remaining loan debt
  • refund the charges that had built up on Mr J's current account because of the failed loan repayments and
  • pay Mr J £300 for the distress and inconvenience it had caused him.

59/4
lender allowed customers a personal loan for a business venture that later proved unsuccessful

Mr and Mrs N lived in a coastal resort town. Although neither was in permanent employment, they managed on a fairly continuous series of seasonal and part-time jobs.

After seeing a demonstration of a new funfair attraction, the couple thought they could turn it into a profitable venture. Keen to buy and set up the attraction as quickly as possible, they prepared a business plan and applied to their bank for a business loan.

The couple were extremely disappointed when their application was turned down and they asked the bank to reconsider. After they were again refused a business loan, Mr and Mrs N asked their branch manager if there was some other way in which they could get the money they needed. Initially, the branch manager said the bank could not help. However, the couple were very persistent and he eventually agreed to arrange a personal loan.

Although Mr and Mrs N ordered the attraction right away, there was quite a long delay before the manufacturers were able to deliver it. So it was already halfway through the summer season before the couple were able to open for business. Even then, they experienced unexpected setbacks - the town had its wettest summer for years.

Because they had not made the profits they had hoped for, Mr and Mrs N soon found themselves unable to meet their loan repayments. When the bank contacted them about this, the couple said the bank was partly to blame. They said it should never have encouraged their venture by agreeing to lend them money. So, in their view, the bank should be prepared to accept a share of the losses.

complaint rejected
The bank's initial response to their business plan made it clear that it did not regard the proposed venture as a particularly good lending risk. So we did not accept that the bank had encouraged the couple to borrow. Mr and Mrs N had clearly understood that the bank thought this was a highly speculative venture. But they had been insistent that they wanted to go ahead anyway.

Because Mr and Mrs N had taken out a personal loan, the bank was not an equity partner in their business. So, in the same way that it would not have been entitled to a share of the projected profits, it was not obliged to accept a share of the losses.

We concluded that the bank was not liable to Mr and Mrs N for their losses, and we rejected the complaint. However, we reminded the bank of its duty (under the Banking Code) to treat cases of financial difficulty sympathetically and positively.

59/5
customer withheld information when applying for a loan, but said the lender should have realised she was unable to afford the repayments

Ms G, an assistant manager in a department store, applied successfully for a loan from the bank where she had a current account. But within a few months she was finding it a struggle to make the loan repayments.

She complained to the bank, saying it should have made sure she could afford the loan before it agreed to give her the money. She believed it should have looked closely at the outgoings from her current account before approving her loan application. And she said that if it had done so, it would quickly have realised that she had not revealed all of her existing debts on the application form.

complaint rejected
Ms G freely admitted that she had not disclosed all her existing debts when asked to do so on the loan application form. We considered that she was fully capable of understanding both the application process and the risk (if she gave inaccurate information) of being given a loan that was beyond her means.

We were satisfied that the bank had not suggested it would base its decision on any information other than the details provided on the form. It was true that the bank could have investigated the outgoings on Ms G's current account. However, we did not think it would be fair to say that it had a duty to do so.

We rejected the complaint, but reminded the bank of its duty (under the Banking Code) to treat cases of financial difficulty sympathetically and positively. Ms G later told us she had approached a not-for-profit debt counselling agency for help with her overall financial situation. The bank had agreed to co-operate with the agency.

59/6
customer's credit facility withdrawn by his lender in a way that he felt was unfair

Mr Y was self-employed and ran a number of small business ventures. He often used the overdraft facility on his personal current account but the account was normally in credit for part of the month.

However, over a period of six months, Mr Y became increasingly reliant on the overdraft facility. Eventually, he reached the stage where his current account was not operating in credit at all.

The accounts for Mr Y's business ventures were all held at another branch of the same bank, so the bank knew these ventures were were not doing at all well. It decided to withdraw the overdraft facility on Mr Y's current account.

Mr Y complained that the bank had not given him any notice, so he had not had the chance to put his affairs in order. He said he had only known about the withdrawal of his overdraft facility when the bank had caused him the embarrassment of having his debit card refused when he tried to pay for his shopping in the local supermarket.

Mr Y also complained that the branch holding his personal account had - improperly in his view - discussed his financial affairs with the branch holding his business accounts. He thought it was this that had caused it to "jump the gun" when deciding to withdraw the overdraft facility.

complaint rejected
We established that the bank had written to Mr Y on three separate occasions in the months before it withdrew his overdraft facility. Each time, it had said it was unhappy with the way he was operating his current account. It had also warned him that the overdraft facility was intended to provide temporary credit, not a permanent loan.

So we believed it would have been perfectly clear to Mr Y that the bank was not prepared to allow his overdraft to continue indefinitely.

In normal circumstances, we would still expect a bank to give a customer specific notice that it intended to withdraw an overdraft facility. On this occasion, however, we were satisfied that it had been reasonable for the bank to remove the facility without notice. On the day in question, a cheque (from one of Mr Y's business accounts) that he had paid in to his personal current account was returned unpaid, marked "refer to drawer". Since paying in the cheque, Mr Y had made several business-related purchases against its value, using the debit card on his personal account.

When the cheque was returned, the branch holding Mr Y's current account had telephoned the other branch to ask if there was any chance of the cheque being paid, if it was re-presented. The answer was "no".

The returned cheque had caused Mr Y's current account to become substantially overdrawn - far in excess of its limit. So we thought the bank's decision to withdraw the overdraft was a legitimate exercise of its commercial judgement, and did not breach the Banking Code. We rejected the complaint.

59/7
customer's credit facility withdrawn by his lender in a way that he felt was unfair

Mr F referred his complaint to us when he was unable to resolve matters with his bank. He had held a current account with the same bank for a number of years, and the overdraft facility had always been renewed automatically, without comment.

So Mr F said he had been furious when he discovered the bank had withdrawn the facility without giving him any notice. This had caused him some difficulties, since he had been overdrawn at the time. And although he managed fairly speedily to transfer his account to a different bank, in the meantime he had been charged substantial interest, at the rate for unauthorised overdrafts.

complaint upheld
The bank said it had made a number of (documented) telephone calls to Mr F about the difficulties on his account. And it said it could provide comprehensive internal notes on its concerns about his account, up to the point when it withdrew the overdraft facility.

It was clear from the bank's records that Mr F had been having considerable problems keeping his current account in good order. And his cheques had occasionally been returned unpaid. However, there was nothing to suggest the bank had ever made its concerns clear to Mr F, either during the telephone calls or at any other time.

We accepted Mr F's statement that the telephone calls had consisted of brief requests that he call at the branch for an "account review". He had interpreted these requests as "standard marketing calls", made with the intention of selling him some new product or service, so he had ignored them. Nothing specific had been said in the calls about his account and he had been given no reason to suspect his overdraft facility was in jeopardy.

The bank's decision to withdraw the overdraft was a legitimate exercise of its commercial judgement. However, we did not believe this decision had been carried out fairly. In our view, the bank should have given Mr F a clear warning about what would happen if he did not run his account properly. And it should have given him a reasonable amount of notice before withdrawing the overdraft facility.

We accepted that the bank's failure to give a clear warning or any notice had caused Mr F stress and difficulty, because he had been forced to arrange a new account at short notice. So we said the bank should pay him £150 in recognition of the inconvenience it had caused.

We also thought it unfair of the bank to charge Mr F interest at its "unauthorised" rate, following its withdrawal of the facility. So we said the bank should refund to Mr F the difference between its normal rate of interest and the rate it had charged him.

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ombudsman news issue 59 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.