Davina was reviewing her lending and asked a mortgage broker to refinance three loans for three properties she owned with a new bank. Davina told the broker that she wanted the finance to be:
- interest only
- fixed for two or three years
- at a competitive interest rate
- with each loan to be secured against an individual property and
- additional finance to be available for when she purchased another property later in the year.
The broker found a new bank for Davina and sent the loan instructions to the bank.
The bank sent the loan agreement to Davina’s lawyer and Davina signed the loan agreement at her lawyer’s office.. All went well until three years later, when the fixed interest rate period ended. Davina discovered:
- she had been paying principal and interest
- the one loan was secured against all her properties
- there was no additional finance available.
Davina complained that the broker had failed to follow her instructions, and as a consequence:
- the higher principal and interest loan repayments she had been paying had placed her under financial pressure
- she was unable to sell one property without affecting the lending against all the other properties
- she had the additional inconvenience of arranging finance again when purchasing another property.
Davina complained to FSCL.
The broker’s view
The broker said she followed Davina’s instructions, and considered it was the bank that had failed to structure the loan as it had agreed to do. The broker referred to her emails to and from the bank confirming that the bank had agreed to an interest only structure. Unfortunately, the broker was unable to provide us with emails to show that the bank also agreed to Davina’s other requirements, but said she had passed these instructions on to the bank.
The broker explained that she could not have known about the bank’s mistake because the loan documentation was sent directly from the bank to Davina’s lawyer. In the broker’s opinion it was for Davina’s lawyer to explain the loan agreement to Davina and, if the loan documentation differed from Davina’s expectations, Davina should have raised her concerns before signing the loan agreement.
Unfortunately, the only record we had of the transaction was the broker’s emails to and from the bank and Davina. The broker had not kept any diary notes and nor had she completed a loan structure form sent by the bank with its letter of offer. The broker explained that although a specific loan structure form is now part of the lending application process, at the time she arranged Davina’s finance it was more usual to negotiate the terms over the telephone and by email.
Bank failed to structure as interest only
From the information available we were satisfied that the bank had agreed to an interest only structure, but had failed to structure the loan agreement correctly. It was not possible to establish whether or not the broker told the bank about Davina’s other requirements.
Other errors more difficult to identify
Whether the loan should have been structured as three loans or one loan was more complex. We had insufficient evidence to determine who was responsible for this misunderstanding. However, the bank’s original letter of offer included a requirement that the loan be secured by interlocking guarantees from Davina. Even if the lending had been structured as three separate loans secured against the three properties, the interlocking guarantees would always complicate the sale of one property.
Who is responsible?
As we are unable to consider a complaint about a bank, we focused our attention on the other people involved:
- the broker
- Davina and
- Davina’s lawyer.
In our view, the broker’s responsibility for the error was minor. The broker did not have the opportunity to check the documentation before signing, so could not have known about the bank’s error. Arguably the broker could have completed a loan structure form, but we considered this to be a relatively minor error.
The broker’s instruction to the bank that the loan be interest only was clear, and even if the lending had been structured as three separate loans, interlocking guarantees would always have tied the three properties together.
Davina and Davina’s lawyer?
We found that Davina and her lawyer had to share the greatest degree of responsibility. Davina’s lawyer ought to have gone through the loan agreement with Davina to make sure the loan correctly reflected her instructions before signing the loan agreement. In the context of this discussion, it should have been apparent to Davina that the loan did not reflect her intentions.
We also considered that Davina should have noticed that she was paying more in loan payments than she had expected and found the error before three years had passed.
We did not uphold Davina’s complaint about the broker. We suggested that she may wish to pursue a complaint about the bank with the Banking Ombudsman and the lawyer with the Lawyers’ Complaints Service
Even if a borrower believes they have clearly communicated instructions it is very important to check the loan agreement is in accordance with those instructions. Before the loan agreement is signed it is relatively simple to correct a mistake. But once the loan agreement has been signed, and a significant period of time has passed, it can be very difficult to reverse a misunderstanding.
We remind all financial advisers to keep careful records. Fortunately, the broker’s email records assisted us in our findings on this complaint, but if the broker had been able to show Davina her clear instruction to the bank, Davina may focused her complaint entirely on the bank, avoiding a complaint about the broker to FSCL.