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It does sound crazy, some lenders will go by their credit report, which can be 2 months out of date, and then the weight of proof to evidence things have been cleared is the applicants.
If it still shows on your credit report as outstanding, and you have a large payment going out that can be seen on bank statements, the lender might be concerned that your outgoings are far in excess of what you have told them.
If commitments are recently paid off, which many people do before applying for a mortgage, quite a few lenders will reduce your borrowing, and won't care that you've cleared them or intend to clear them.
Acliff-
Sure, thats a scenario that happened all the time.
What happened for us was that the lender saw a monthly DD payment for the full balance of the credit card and then saw a bank transfer to a credit card (didn't show account number of card on statement) so the lender decided that my wife had a second credit card that wasn't on her credit report and that she hadn't declared on the application.
Their finger was hovvering over the decline button and we had to prove beyond doubt that the bank transfer was to the same credit card that the DD payments were going to.
Balance was paid in full every month for last 3 years.
Stonehedge
We almost had our application declined because my wife paid off her credit card early by bank transfer two months ago. Madness.