Westpac-owned Bank of Melbourne turned a business loan into a residential loan because its officers wanted to earn bonuses and get the customer to sign up before a competing bank offer was accepted, the financial services royal commission has heard.

The customer was forced to make good the bank’s deliberate misconduct later by having $100,000 temporarily impounded to boost BoM’s security on the loan. Commercial loans have lower loan-to-valuation (LVR) ratios and the bank wanted to hold the cash to make up that difference.

Alastair Welsh, an executive with BoM owner Westpac, agreed that when the money was withheld by BoM following the sale of an investment property owned by Bradley and Tara Wallis in Port Macquarie in NSW in 2017, it was unfair.

“It was our mistake. We should not have put that mistake on the client,” Mr Welsh said.

“I put it to you that the bank decided what it wanted to do which was to retain the $100,000 and it decided to worry later about whether it had any legal entitlement to do that,” counsel assisting Rowena Orr QC said.

“You retained the $100,000 as a bargaining chip to get Mr and Mrs Wallis to restructure the loan … because of the conduct of [a bank officer] back at the loan origination point.”

Mr Welsh agreed.

The Wallises went to BoM in in 2016 to get finance for a move from Melbourne to buy a bed and breakfast with a cafe attached on eight hectares behind Port Macquarie. They had sold a property in Melbourne and owned an investment property at Port Macquarie where Mr Wallis’ parents lived.

They identified the property they wanted to buy at Byarbarra and applied for a loan of $560,000. In the meantime they had approached NAB and got an offer for a loan of $492,000.

The loan process at BoM slowed because the bank took the view that it was a commercial proposition and needed a commercial loan at a maximum loan-to-valuation ratio of 65 per cent which would have demanded a higher contribution from the Wallises, or a smaller loan.

When the bank heard NAB had made an offer, its loan offers launched an email conversation that said they needed to do something to fend off NAB as the deal was attractive for them.

So the officer ultimately characterised the loan as residential to get it over the line at the higher LVR of 80 per cent. The deal went through without the bank following its normal processes of finding out the nature of the business the Wallises wanted to carry out and and without the officer actually viewing the property.

“They wanted to earn commissions,” Mr Welsh said.

In 2017 the Wallises wanted to move to the Gold Coast and sought to refinance their  loans. The process revealed the wrong categorisation of the Byabarra property as residential.

When they sold their Port Macquarie property that year, the bank acted to make up for the mistake by impounding $100,000 until the loan was reclassified as commercial. The money was paid back to the Wallises after they sold the Byabarra property in 2017.