Aussie Home Loans flunked risk audit, failed to report fraudsters

Until just two weeks ago, the Commonwealth Bank-owned Aussie Home Loans lacked a policy guide for responsible lending.

Lynda Harris from Aussie Home Loans. Picture: Stuart McEvoy.

Until just two weeks ago, the Commonwealth Bank-owned Aussie Home Loans lacked a policy guide for its hundreds of mortgage brokers on how to engage in responsible lending.

Evidence before the financial services royal commission has painted a devastating picture of Aussie, one of the country’s biggest mortgage brokers, revealing an organisation that lacks the ability to detect fraud and failed an internal risk audit as recently as December.

The commission heard evidence that Aussie failed to report to police four brokers who were eventually convicted, failed to tell customers that their broker had been sacked for misconduct and still lacked a dedicated team devoted to tracking down fraud.  Revelations about Aussie closed an action-packed first week of full public hearings at the commission, which has also heard evidence about NAB bank managers taking bribes and a CBA state manager trying to penalise a broker for speaking out to the media.

The commission has spent much of the past two days hearing details of four Aussie brokers — Shiv Sahay, Madhvan Nair, Emma Khalil and Bernard Meehan — who in 2013 and 2014 forged documents and provided false information to get home loans approved and earn lucrative commissions for themselves and the company. All four have since been convicted following an investigation by the Australian Securities & Investments Com­mission that was prompted by the banks hit by the fraud, not Aussie.

The litany of bad behaviour exposed by the commission left one senior Aussie executive, HR boss Lynda Harris, unable to stand by the company’s 2014 statement to the corporate regulator that it had run its business “efficiently, honestly and fairly” and in compliance with the law.

Mortgage brokers earn both an upfront and a trailing commission, both based on the amount of money borrowed, for selling home loans.

Asked by commissioner Kenneth Hayne if Aussie did “anything to reward anyone for obeying the law”, the company’s chief financial officer, Giles Boddy, said: “I’m not aware of anything.”

Aussie earned a “red rating” — a fail mark — in a December audit report prepared by CBA’s internal assurance team.

“There are a significant number of issues which need immediate remediation,” Mr Boddy told the commission.

These problems included responsible lending and “broker behaviour”, he said.

Mr Boddy, who was parachuted into the job from CBA proper in 2016 and remains on “indefinite” secondment from the bank, said Aussie had made progress in cleaning up its processes after a similarly scathing audit in 2015.

However, he admitted Aussie had not moved to fix problems fast enough to satisfy the CBA’s audit team, earning a “marginal” rating.

“If that had been done in a timely manner, then the management awareness would have been satisfactory and the overall score would have been amber,” he said.  He told the commission that Aussie had been improving the way it dealt with risks, increasing the number of issues it identified from 17 in 2015 to 77 last year.

“We’re focusing on our processes of identifying our risk and doing something about it,” Mr Boddy said.

Asked by Mr Hayne how this could be reconciled with the audit’s finding that management had been too slow, Mr Boddy said: “we were too slow to pick up these issues”.

The commission heard that as a result of the failed audit, Aussie introduced a responsible lending policy on March 2.

“We didn’t have a formal document called the responsible lending policy, and that’s why we put it in place to meet further requirements to comply with responsible lending,” Mr Boddy said.

Mr Boddy dared to disagree with a proposal to abolish commissions put forward by CBA chief executive Ian Narev, who is to be replaced by head of retail banking Matt Comyn next month, in a secret submission to an industry review last year.

In a letter to former public servant Stephen Sedgwick, who conducted the review, Mr Narev said that “the use of upfront and trailing commissions linked to volume can potentially lead to poor customer outcomes”.

However, under questioning from junior counsel for the commission, Eloise Dias, Mr Boddy said this was not his experience.

“That may be mortgage broker industry impact, but not at Aussie,” he said. The remuneration structure had advantages for customers who were “not paying” the trail commission.