I'm assuming the contract was contingent on obtaining financing which is why this became an issue. You need to check that, because iof they signed the contract AFTER getting a loan commitment, it might not have been. If it wasn't, then the loan denial has no bearing and they forfeit their down payment.
But what Diane is saying about loan committments is accurate. I had a buyer pull something similar on me. They wanted to apply for NYS sponsored loan. But since the waiting period for that was longer, the contract was written that they would have to apply for a conventional loan as well. After a bit they informed us that they had received approval on the state loan. So we went ahead with the contract on the house were buying. We found out later that what they had received was not a commitment but just the first step in the process. The result being that the closing was postponed which almost caused me to lose the house I was buying.