Aussie Home Loans had formed a view that Westpac home loans were the easiest to obtain among the big lenders because they only required a letter of employment for proof of income, the banking royal commission has heard.
The mortgage broking company was criticised on Friday for its lax compliance processes concerning the fraudulent behaviour of four of its brokers between 2013 and 2016, one of whom was first flagged as a potential problem because more than half of his loans were going to Westpac.
The commission heard that Westpac home loans up to a certain loan-to-value ratio only required a letter of employment from applicants, with no other supporting documentation, such as payslips.
After at least two brokers were terminated for falsifying letters of employment in several loan applications, Aussie Home Loans began reviewing brokers who were sending a high proportion of their loans to Westpac.
The senior counsel assisting the commission, Rowena Orr, asked Lynda Harris, Aussie Home Loans’ general manager of people and culture, if this was because “Aussie had formed the view that Westpac had credit assessment processes that were more lax”.
Harris said “if they were just requiring a letter of employment, as opposed to payslips, that would be something that brokers would become aware of. Westpac had a policy that it was going to be easier to provide necessary documentation.”
Orr asked, “Is a letter of employment easier to falsify?”
Harris agreed it would be.
“So there was a greater risk of fraud at Westpac?”
Harris responded, “if a broker is putting a substantial majority of loans to one lender, that is a trigger to investigate.”
Aussie Home Loans came under fire for repeatedly “outsourcing” its compliance obligations and responses to its brokers’ misconduct, in Orr’s words.
The senior counsel’s questioning revealed that in all but one of the four cases of broker misconduct examined by the commission on Friday, Aussie Home Loans did not inform the regulator, the Australian Securities and Investments Commission (Asic), of their wrongdoing or the circumstances of their departure.
The fraudulent behaviour of former Aussie brokers Shiv Sahay and Emma Khalil were not picked up by Aussie itself, but by the lender, which Orr suggested showed Aussie’s processes were insufficient at the time. Of the four brokers whose activities were examined by the commission on Friday, three of the brokers – Shiv Sahay, Emma Khalil and Madhvan Nair – were later convicted, and the fourth, Bernard Meehan was banned by Asic.
Aussie only terminated the contracts of the brokers after the lending bank had concluded there had been fraud, and it did not tell clients of three of those brokers that they had been fired for misconduct, just that they had “left”.
This included a family who were facing the loss of a baby while their loan fell through due to the misconduct of Sahay. Sahay had sold them a higher-value loan on the incorrect basis that they were eligible for the first home buyer’s grant, and the family had already paid out a significant sum to their builder when the loan collapsed.
Further, Aussie did not report the brokers’ behaviour to the police or even in some cases to the professional association of which they were members, the Mortgage and Finance Association of Australia, in breach of their compliance obligations which they certified annually to Asic.
It was only after Asic later pursued the brokers that fraud charges were laid.
Harris confirmed that Aussie sometimes kept the trail commission of loans brokered by fraudulent brokers, saying it was up to the relevant lender to revoke the commission.
The commission had heard on Thursday from the Commonwealth Bank that the structure of brokers’ trailing commissions – which last for a customer’s entire home-loan term – created a conflict of interest by incentivising brokers to sign customers up for longer-term, higher-interest loans.
But Aussie Home Loans’ chief financial officer, Giles Boddy, said the company did not support any change to the way brokers are paid, and that he believed Aussie’s arrears were no worse than the banks’ at around 1%.
Harris and Boddy told the commission that Aussie Home Loans, now a wholly-owned subsidiary of the Commonwealth Bank, had been working to strengthen its risk assessments and fraud detection processes since its former brokers’ fraud was uncovered.
The hearing continues.
