“Only when the tide goes out do you discover who’s been swimming naked.”
– Warren Buffett, 2001
Exactly one year ago, Australian Prudential Regulatory Authority (APRA) head, Wayne Byres, gave testimony to the Senate Standing Committee on Economics in Canberra, whereby he admitted that APRA had acted too late in addressing lending standards, which in some cases had fallen to “horribly low” levels that lacked “common sense”.
Since that time, numerous reports of systematic mortgage fraud have emerged.
In February, Variant Perception released a report by Jonathon Tepper, which uncovered widespread poor lending standards at the banks:
Underwriting standards are very poor at the big banks. We spoke to many mortgage brokers and banks, and getting a high loan-to-value ratio mortgage is simple and requires only two payslips. Banks do not generally verify the payslips. The local regulator ASIC confirmed this in a report last year, although the situation is even worse than the regulator believes…
In our due diligence, we told mortgage brokers and bank managers that we required a 95% loan-to-value mortgage at 10x our gross household income to buy our dream house, and we were consistently told it was not a problem at all. All we needed were two payslips and mortgage insurance. We asked if the bank would call our employer, and both reputable and disreputable brokers said banks rarely verified payslips. Also, “most of the people checking documents are in Indian call centres.” Furthermore, we were told that as long as the payslips had the right Australian Business Number (ABN) and the business checked out, that was enough.
…we were informed from various sources that disreputable brokers had software to make authentic looking tax returns for clients who needed mortgages. We were encouraged to lie about our incomes by multiple brokers in order to get dodgy loans past bank loan officers.
And in May, LF Economics’ lodged a detailed submission to the 2016 Parliamentary Inquiry into Penalties for White-Collar Crime, which provided compelling evidence showing that Australia is a haven for white-collar criminality and control fraud.
This report found evidence of 21 Australian lending institutions and more than 1,000 examples of where people’s loan application forms had been fudged. As LF Economics’ Lindsay David explained on ABC’s Four Corners:
Lindsay David: “There’s a lot of evidence that we have come across that banks are actually fudging the loan application forms of borrowers to make them look a lot more credit worthy than what they are”.
Reporter: “Economist Lindsay David has presented more than 1,100 examples of altered loan forms to Parliament. He says it shows that banks are engaged in predatory, even fraudulent lending”.
Lindsay David: “The banks are literally using liquid paper or other types of ways to clear out the income of a loan applicant and raise it. They are lending to home buyers that have no ability to be able to pay-off their loan and they are basically depending on the property market to continue to rise at a consistent rate”.
Then earlier this month, UBS released a survey of 1,228 Australians who have recently taken out a mortgage and found that 28% of mortgagors stated their application was not factually accurate, with broker-originated mortgages the most dodgy.
Finally, after a full year of doing nothing, APRA has taken action against the banks’ systematic mortgage fraud, ordering them to have their systems externally reviewed. From The Australian:
Appearing before the Senate Economics Legislation Committee, Australian Prudential Regulation Authority chairman Wayne Byres revealed the regulator had informed the “largest institutions” to get their external auditors to review fraud control mechanisms to ensure they are working…
Asked today if banks approving inaccurate loans may be systemic or in isolated cases, Mr Byres said APRA was taking the issue “seriously” and had homed in on verification processes, such as evidence of income, as part of broader efforts to strengthen lenders’ serviceability assessments.
“We have told the larger institutions that we’ll be asking them to have their external auditors do a review of what are essentially fraud control mechanisms to ensure that there are mechanisms in place and…are working,” he added.
One wonders why APRA is not reviewing the banks’ fraud control systems themselves, rather than palming it off to a third party. Who else is there to do it?
Moreover, with the banks now closing down branches in favour of mortgage brokers, who have a track record of dodgy underwriting, this issue is not likely to go away anytime soon.
All of which highlights, yet again, the pressing need for a banking Royal Commission to get to the bottom of the whole mortgage fraud issue, including APRA’s failure to identify and act.
