Bank’s sad tale of dishonesty and delays

After just two days of hearings, the banking royal commission has painted a dismal portrait of home loan practices at NAB.

Angus Gilfillan of National Australia Bank

Dishonesty, delay and dysfunction — after just two days of hearing evidence in an inquiry set to last at least a year, the banking royal commission has painted a dismal portrait of home loan practices at NAB.

The commission has heard evidence of a fraud ring among bribe-taking bank managers and other employees in western Sydney who, motivated in part by a hunger for bonuses, wrote hundreds of millions in dodgy home loans as part of NAB’s loan introducer program.

It has heard that three years after NAB first got word that something was going wrong in the introducer program, the bank is yet to compensate a single customer caught up in its web of lies.

And it has also heard of a secret probe by the prudential regulator last year into the bank’s habit of relying on an expenditure benchmark to determine whether customers could afford a home loan, instead of their actual household expenses.

NAB’s head of home loans, Angus Gilfillan, told the commission that there were concerns too many mortgage brokers were using the “conservative” Household Expenditure Measure (HEM), developed by the Melbourne Institute, which is linked to the University of Melbourne.  The first two days of evidence have made clear some of the key issues commissioner Kenneth Hayne is pursuing: whether the banks are doing enough to control their staff and run their businesses within the confines of the law, the role of sales agents such as mortgage brokers, and whether bonuses and incentives encourage misconduct.

Yesterday, Mr Hayne also foreshadowed that the commission would investigate whether banks are really transferring all the risk to investors when they bundle up and sell home loans as residential mortgage-backed securities.

NAB opened proceedings at the commission yesterday by admitting it had failed to provide the inquiry with a crucial document showing that the board of the bank knew about the western Sydney scandal in early November 2015, at least three months before the bank reported the breach to the corporate regulator. The law requires banks and other financial services licence holders to report significant breaches to the Australian Securities & Investments Commission within 10 days of detection.

Under questioning by counsel assisting the commission, Rowena Orr, QC, NAB’s executive general manager of growth partnerships, Anthony Waldron, was unable to explain why the document had not been produced in response to the commission’s initial demand for material relating to misconduct.

However, it is believed the bank was prompted to look for the document — minutes of the board risk committee — the previous night after a senior executive reviewing Tuesday’s evidence raised the possibility the issue might have been reported to the board earlier than the commission had been told.

ASIC declined to comment on the apparently tardy breach report, with a spokesman telling The Australian the regulator “does not intend to provide a running commentary on matters raised before the royal commission, and particularly where it touches on issues that could be subject to investigation.’

The royal commission has been examining a fraud ring run by bankers in a clutch of NAB’s western Sydney branches who were hungry to earn bonuses based on how many home loans they wrote.

While introducers, who received a commission of up to 0.6 per cent of the amount lent, were supposed to come from the ranks of professions including financial planners and lawyers, the commission has heard that those involved in the Western Sydney scam included a gym owner and a tailor.

Some NAB bankers were sacked over the rort but others were only docked a quarter of their bonus, the commission heard.

An investigation by NAB, codenamed Project Beacon, found the scam was also being run by employees elsewhere in NSW and in Victoria.

The bank first got wind of potential problems in western Sydney in April 2015, and received whistleblower reports in September and October that year.

Counsel assisting the commission, Rowena Orr, said that just four introducers “provided $139.78m in loans drawn down to NAB to the end of October 2015”.

Some $488,000 in commissions was paid to a single introducer, she said.

Documents shown to the commission reveal that investigations by NAB and KPMG found bankers were colluding to exploit gaps in the NAB loan process.

An internal NAB email, sent just before Christmas 2015, shows one bank manager was dismissed for misconduct on multiple occasions.

The email tells the manager that “on multiple occasions you wilfully entered false phone numbers on customer files, further on multiple occasions you have entered false information in relation to referrer contact details”.

“You were dishonest in your response when you initially stated you were unaware how identical numbers had come to be entered on different customer profiles”, the manager was told.

Ten bankers were sacked and another 10 resigned as a result of Project Beacon, the commission heard.

Ms Orr took Mr Gilfillan to a letter NAB’s chief risk officer, David Gall, sent the Australian Prudential Regulation Authority on September 15 last year.

The letter — a response to a “targeted review” by APRA — followed an investigation of NAB’s use of the HEM by consultants at Ernst & Young.

In its report to NAB, EY found that “a significant volume of customers had reported general living and entertainment expenses within their loan applications that were effectively equal to HEM or within 0.5 per cent”.

About half of those customers came via mortgage brokers, the report found.

NAB was now part of an industry-wide process to increase the HEM, Mr Gilfillan said.