Banks 'negligent and reckless' with low-doc loans: Denise Brailey in Senate testimony

Most of the low-doc loans banks provided to borrowers would have been rejected if they had made a "simple phone call to the borrowers”, banking consumer advocate Denise Brailey has testified before a Senate inquiry into behaviour of the banking sector post-GFC.

But she says banks chose “in a corporate decision” not to make this phone call to ascertain the true financial circumstances of the borrower.

Brailey, who runs the Banking and Consumers Finance Support Association (BCFSA), brought with her to the inquiry a “small bundle” of 4,000 “falsified loan applications", which she said includes applications to every bank in Australia.

“The four majors are in there.

“They are all responsible, through a series of emails from banks to brokers, instructing the brokers how to get their deals across the line — 'make the deal fit' was their usual interpretation."

Brailey’s views are shared by former Mortgage Miracles mortgage broker Kate Thompson, who told the ABC’s 7.30 report that she was earning $5 million a year through low-doc lending, but all based on a “lie”.

“I do not think there was a bank or non-bank lender that wasn't doing it. I — from my files alone, I am certain I could evidence every single bank,” said Thompson, who was WA mortgage broker of the year in 2007 and is now facing fraud charges.

In her August 2012 Senate testimony, Brailey said lenders targeted older people, carers, people on parenting allowance and the aged pension.

According to Brailey, any lender who approved a loan without verifying the loan application data with the borrower was “imprudent, negligent and in many cases just plain reckless”.

In the case of the 25 Australian Bankers' Association (ABA) members, she claims they are "also in breach of their contract with the borrower to assess the borrower's ability to repay the loan, as provided for in article 25 of the Code of Banking Practice".

"No lender, and no holder of loan securities, including the government, should be allowed to maintain any loan which the lender would not have given had it applied the simplest of lending criteria tools—namely, verifying the loan application details with the borrower.

“And that simply was not done,” she said.

During her testimony Brailey described how low-doc lending was facilitated.

“The banks provided commissions for mortgage managers, mortgage originators and mortgage introducers that came down in a chain to employing brokers.”

Brailey also pointed the finger of blame at business development manager (BDMs), who were employed by the banks and who worked with mortgage brokers to get mortgage deals approved.

She says BDMs would teach brokers how to use an online loan servicing calculator and “put in certain parameters such that the calculator, belonging to the bank — engineered by the bank — would actually bring out a figure that was highly inflated, based on a possible rental from a property.

“There is just no truth in the document at all." 

Brailey says  the paperwork suggests brokers were merely following policy changes that were both rapid and carried massive risk, which was to be borne by the consumer.

“We have the loan application forms from over 400 people in the last six weeks. During that time, not one of them is a clean document—each one has been fraudulently dealt with.

“But the brokers will get the blame that they put the figures on, but the figures that they have written in the original loan application form are calculated by the banks' calculator through the system, as taught by the BDMs.

“This structure needs to be looked at before we can even start to work out whether we have a problem here in Australia.

“My evidence shows that we have a massive problem here in Australia with these low-doc loans," she said.

"I want to know what we are going to do about them, because the government has purchased around $20 billion worth of them.”

Brailey was referring to the program instigated by the government's Australian Office of Financial Management (AOFM) to buy mortgage-backed securities from lenders to keep the securitisation market afloat after foreign buyers of these mortgage bundles disappeared in the wake of the GFC.