Royal Commission reveals how bankers, brokers and borrowers game the system

14 March 2018

Royal Commission reveals how bankers, brokers and borrowers game the system

Anthony Waldron, an executive of National Australia Bank Ltd (NAB), resumed his evidence before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, as the first public hearing continued at 9:45 am on Wednesday.

Rowena Orr QC, senior counsel assisting the Royal Commission, revealed that a significant number of customers referred via NAB’s Introducer Program ended up in financial difficulty as a result of unscrupulous Introducers and bankers.

As OPMG reported on Tuesday, the Introducer Program pays commission to third-parties for referring their clients to NAB for loans.

NAB’s lax approach meant that a gym owner became one of the highest-volume Introducers by pushing loans on customers. Just four Introducers were responsible for a combined total of $139 million worth of loans.

Mr Waldron acknowledged flaws in NAB’s loan application process, after Ms Orr cited the example of a borrower who was credited with rental income as part of their assessment, despite the borrower living in the property and it generating no rental income whatsoever.

It also came to light that NAB documents acknowledged that there were inadequate checks and balances on bankers, who were relied upon to act honestly.

Audits of the Introducer Program resulted in the number of Introducers falling from 8000 to about 1400.

Mr Waldron stated that Introducers were removed from the program for reasons including dormancy, introducing only their own loan, not being in the target industries, or being suspected of misconduct.

He denied that the main reason was that they were not referring enough borrowers. Mr Waldron testified that 1360 borrowers have been identified as affected or potentially affected by misconduct.

Internal NAB documents show that Mr Waldron was unhappy with the slow progress towards a customer remediation program, but he testified that 26 offers of remediation are likely to be made within the next fortnight.

Angus Gilfillan, NAB’s executive general manager for consumer lending, took the stand next. Ms Orr asked Mr Gilfillan about the Household Expenditure Measure (HEM), developed by the Melbourne Institute to estimate living expenses.

Mr Gilfillan stated that NAB uses the HEM as a baseline measurement for living expenses. If a customer declares living expenses lower than the HEM, the banker handling the loan application is required to make further enquiries.

However, Mr Gilfillan’s evidence was that a senior banker could previously approve a “serviceability waiver” where living expenses were set slightly below the HEM even if they were actually higher.

While this has now been set as an absolute floor, Mr Gilfillan testified that many loan applications (especially coming via mortgage brokers) were declaring living expenses within 0.5% of the HEM, indicating that the system was being gamed.

The next witness was broker Mark Harris, who alleged that the Commonwealth Bank of Australia (CBA) withdrew his accreditation to write loans because he wasn’t writing enough.

Mr Harris expressed concern that “if there are minimum performance standards … that will push brokers into using Commonwealth Bank where they should not have done.”

The hearing will recommence on Thursday at 9:45 am.