Brokers are homing in on mortgage weak link, royal commission hears

MORTGAGE brokers have widely been using a questionable formula to assess whether home loan borrowers can make their repayments, the banking royal commission has heard.

MORTGAGE brokers are using a questionable formula to assess borrowers’ living expenses and “bypass” more rigorous tests applied by banks, the banking royal commission has heard.

And National Australia Bank is yet to pay any remediation to borrowers affected by a scandal that surfaced internally almost three years ago.

As the probe continued yesterday, the commission heard mortgage brokers were frequently using a statistical benchmark to determine the living expenses of mortgage applicants.

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The benchmark — called the household expenditure measure — is broadly regarded as a legitimate test of expenses.

But industry experts are concerned that in many cases, it is being used in place of a more rigorous assessment of borrowers’ expenses as a means of overstating their ability to repay loans.

That means home buyers may have been given mortgages they will not be able to repay.

The commission heard the banking regulator, the Australian Prudential Regulatory Authority, last year started reviewing the use of the formula.

Counsel assisting the commission Rowena Orr, QC, on Wednesday raised concerns about its use. Questioning NAB executive general manager of consumer lending Angus Gilfillan, she asked if mortgage brokers were using it to “bypass” the bank’s more rigorous lending standards.

“Yes,” Mr Gilfillan said, agreeing that the benchmark needed to be strengthened.

Commissioner Kenneth Hayne asked Mr Gilfillan if banks were hesitant to tighten standards as there would be a “first mover penalty”.

Mr Gilfillan said that was something to consider.

Counsel assisting the commission Rowena Orr, QC.

It also emerged on Wednesday that NAB was yet to pay any remediation to customers given loans based on documents that had been falsified.

On Monday, the commission heard that rogue staff at five branches across greater western Sydney had falsified documents to help secure loans for customers.

In return, they received cash bribes — handed to them over the counter in white envelopes — from businesses who referred the borrowers under the bank’s “Introducer” program. So-called introducers then received a commission from the bank.

NAB executive general manager for broker partnerships Andrew Waldron said 1360 customers were potentially impacted by bankers abusing the program.

Mr Waldron said the bank had processed 71 per cent of ­affected customer files and 26 would be receiving offers in the “next week or two”.

The bank expects to pay out about $10 million to victims — mostly people who ended up with mortgages they have had trouble servicing — although $23 million was initially set aside. By early 2016, NAB had identified six customers with $3.5 million of loans in arrears, and 90 with $50 million in loans where there were concerns over their ability to service their debts.

Ms Orr was sceptical of the timing of the remediation program. She asked if “the fact the royal commission was coming and you were filing a statement” increased the speed of the process.

Mr Waldron — who only started in his current role after the scandal was unearthed — said no extra staff had been added to process files since the commission was announced. But he added the commission was “certainly top of mind” as he moved to resolved the issue.

The Introducer program is targeted at businesses such as financial planning, real estate and architectural agencies.

But Ms Orr revealed a tailor and a gym instructor were among four people who supplied leads for almost $140 million worth of loans issued by NAB. “There was $139.78 million in total loans from these four introducers to 2015,” she said. “This is a very significant volume of loans for four ‘introducers’.”

The tailor alone received $488,000 in commissions for providing leads, Ms Orr said.

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