The impairment of customer loans

Submission 69

Inquiry into impairment of customer loans

PARLIAMENTARY JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES

10th August 2015

The committee extended the closing date for submissions to 21 August 2015.

Denise L Brailey
President of BFCSA (Inc)
Banking and Finance Consumers Support Association (Inc)
www.bfcsa.com.au

As President of BFCSA (Inc) I am writing this submission on constructed

defaults to impair loans, on behalf of all our members. I am asking this
Committee to consider a number of ways the Loan to Value Ratio Scam has
been engineered by Banks to gain unfair advantage over the customer.
Our example of Mr and Mrs Ys experience will show you how their plight
fits into this Inquirys Terms of Reference.
Put simply, victims call the manufacture and creation of fake valuations as
an LVR Scam, used by our Australian Bankers to hide their own knowledge of
the true valuation of the proposed property purchase price from their
customers. Whether for a house and land package, or an off the plan
apartment purchase, the true LVR is known and yet altered inside the bank,
after the signature is obtained and without passing on this life changing
information to customers.

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Submission 69

The plan to IMPAIR LOANS is always created/engineered as an end concept

from the very beginning of marketing the intended product. The tweaking of
Loan to Value Ratios historically surfaced in the 1980s. Thousands of
people lost their homes. We referred to the activities involving selling
property at $100,000 above the proper and achievable market outcomes
as two tiered marketing. Bankers at the time denied they were
responsible. After decades of probing these activities we now know how
this LVR scam works from inside the Banking Industry.
In our past 19 Inquiries, no-one believed the banks were innocent but the
proof was hard to piece together due to a Cartel style effort to hide the
relevant documents from the intended and vulnerable clientele. Mired in
debt, victims were left with few dollars to fight back. A fully funded court
case challenge against the bankers became highly unlikely. Regulators failed
to take action, but publicly acknowledged it was not a good look.
Banks have intentionally deceived customers into believing this 30 year
INTEREST ONLY SUB PRIME MORTGAGE LOAN STRATEGY, was the best
financial strategy for the customers at that time. The Bank driven aim was
for the loan to default as unaffordable within 4 years or less. Intention to
deceive is a criminal offence requiring a ROYAL COMMISSION into BANKING
as a matter of extreme urgency..
I have decided this time to use a real case study from a BFCSA member,
which explains the knowledge of the Bankers at the first point of contact
and the failure of bankers to hand over the content of consumer files, lest it
incriminate the members of the Cartel.
All of these present cases involve equity loans, sold to asset rich and
income poor pensioners. ARIPs have been publicly identified as the target
market, by the 17 lenders involved. Bankers created and engineered the
suitable product, designed for the publicly identifiable target market.
Bankers controlled the payment of commissions.

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Submission 69

The valuations obtained by the banks prior to approval showed the

discrepancy of $100,000 less than the actual and approved purchase price.
A few of these documents surfaced recently, showing the Bankers
engineered the cover up of their own knowledge at the point of approval.
The Loan to Value Ratios was in reality 139%. The agent explained the LVR
would be no greater than 100%. Clearly bank agent and borrower were not
privy to these valuations. Internal bank documents show the LVR as 42%.
A recent WA Supreme Court Case found once again, the brokers are indeed
the agents of the bank. A recent Qld Supreme Court Case found the Bankers
Code of Conduct to be a regulation, despite Bank Lawyers arguing to the
contrary.
I refer to duplicitous techniques used by banks to record maximised profits
with no consideration or responsibility taken for the financial trauma of
homelessness inflicted on ordinary Australians. I referred to some of the
variations as a witness in the 2012 Inquiry into Banking Post GFC. I also
suggested the Government cannot profit from a fraud.
TERMS OF REFERENCE 1 (a) The practice of Banks and other financial
institutions using a constructed default process to impair loans means the
engineering or the creation of an event of default thereby raising the LVR,
resulting in the loan being impaired.
Case Study on Mr and Mrs Ys Experience:
The couple aged in their sixties were close to retirement. Three years ago,
Mr & Mrs Y answered a knock on the door from a Mr B. appointed by
bankers to write up a loan application form and present to the lending
institution. In early 2012, a loan for $489,000 was a applied for and quickly
approved after financial strategies were presented to Mr and Mrs Y. Ill
health was common for this age group and unemployment consistently
problematic.

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Submission 69

Three years later, we have uncovered the valuations to show the Bank knew
that a sale of this House and Land package would achieve no better than
$345,000, yet approved the loan for $489,000.
Mr and Mrs Y owned their own home, yet still had a $100,000 mortgage
debt owing on their existing home. Mr Y had some super which almost
covered the amount owing on the current mortgage. Mrs Ys part time job
kept the payments going on the mortgage until such time as Mr Ys job was
no longer feasible.
The bank was in full control of the financial strategies given by Mr B, and
also all the necessary approval criteria and lending policies. Mr B had no
training in proper financial planning and the Bank preferred this to be the
case. The low grade sales training came from Bank Staff Officers known as
BDMs (business development managers).
This product could not be sold to first home buyers. Mr B had to ascertain
that Mr and Mrs Y were interested in looking after their retirement needs,
owned their own home (or mostly so) and would be willing to spend a short
amount of time listening to the Plan.
The Plan as explained would be to apply for recommended 100% LVR loan
and no deposit. The first years payments would be advanced as a lump sum
$25k due to the unaffordable nature of the loan. The proposed House and
Land Package attracted inclusive costs of $16,000 of purchasing a property
in a different state.
It is clear the agent had no idea how the plan worked and in order to sound
convincing he drew notes on pieces of paper. He was in fact as much in the
dark as to how it all worked as Mr and Mrs Y. This is a familiar story to
BFCSA and we see many cases such as this. The family were sensible people
and prided themselves at ending their working life with a home of their
own. They did not seek the financial advice on offer, nor did they ring up a

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Submission 69

company or bank.
The developer who built the house and land package on offer as part of The
Retirement Plan was clearly being advantaged by the Banks involvement
in the critical lending process by utilisation of the banks own broker/agent
channel. The law firm involved for the purpose of mortgage agreements
were the banks own lawyers.
Security for the Bank would be in the form of a mortgage security over Mr
and Mrs Ys only asset (their home). Intentionally, the bank knew there was
no security in the investment property. The bank held at least one valuation
prior to approval and additional documents. The only income that could be
used for assessment was Mr Ys current job which fell short of that required
by a prudent banker, hence the suggestion of the $25,000 buffer loan.
Various regulators refuse to acknowledge or inform consumers about the
Bankers Code s 25.1. This and other similar loan approvals went against
everything the Bankers Code of Conduct stood for.
These additional buffers were considered sensible advice, by the bank.
It is the critical buffer loans that push up the Loan to Value Ratio to up to
139%, without the customer being made aware of the risks and dangers.
Customers would have immediately cancelled the application before
approval had they been warned, in their own best interests, of the high risk
of losing their own home.
The valuation of the interstate property explained why $350,000 would be
the top expectant and achievable figure, yet the purchase price known to
the bank prior to approval was $449,000 and a loan advanced for approval
as being $489,000.
Mr and Mrs Y only discovered the valuation documentation recently. The
Bank file also revealed the stated 42% LVR which was utterly false but

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Submission 69

permitted mass approvals of such toxic loans to be treated as a tick-a-box

process, adding to the overwhelmingly bad lending practices and lowering of
lending standards.
In 2012, the Bank must have contemplated that if Mr and Mrs Y were privy
to this independent valuation and the accompanying Valuer Generals
copy, the client would have realised they were being stitched up. The
Ombudsman was told by the bank lawyers: these are commercially
sensitive documents. Yet miraculously, they were sent to Mr and Mrs Y.
by mistake.
BFCSA Members have found FOI documentation with similar admissions
whereby the incriminating evidence has been redacted and again using the
excuse: commercially sensitive. I guess fraud by bankers is commercially
sensitive and the documents show these lending policies were coming from
the CEO position downward. Our entire banking fraternity were acting as a
well organised Cartel of Bankers, selling the same products and using the
same secret methods of process.
The Loan to Value Ratio is based upon misleading data being used for
approval and critical data known to the bank was buried and not revealed to
the customer at that critical time. Had Mr and Mrs Y been informed the LVR
was to be 139%, they would have stepped away. The bank, the agent and
the BDMs caught up in a quota and commission cycle also knew of this
particular stumbling block.
In 2011, under the so called new NCCP laws, and each knew that Mr Ys
income was unlikely to continue for greater than two years let alone to be
able to service a 30 year INTEREST ONLY LOAN. The Bank Plan was to
encourage the release of equity for the bonfire of pure speculation on the
property market and, the purchase price was the (usual 1980s model) of
$100,000 over the top of what was ever achievable on the day the couple
agreed to purchase the second home.

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The different State plan was part of the clever strategy to ensure no drive
by would reveal more unpleasant data.
The banks own agent was simply following bank instructions. Mr B would
have not realised at that stage he was placing the loan customer at
immediate risk of catastrophic financial insecurity, health risks and eventual
homelessness in what the banks admit to regulators, as being a normal five
year settlement plan. Mr and Mrs Y were told the complete opposite, that
the plan was risk free. As most couples do, they asked how risky is this?
Of course the trained sellers know how to answer pesky objections. The
bank logo at some point was used as accreditation.
The existence of the Plan as a bank engineered financial strategy in play,
is extraordinary proof of the intention to deceive at a top level of the
banking industry, as occurred in America and other nations involved in subprime lending. Clearly the bank had no intention of showing internal
documentation to customers, suggesting 42% LVR.
Customers would lose, commissions would be paid and the Bank accepts no
responsibility and yet: the Bank Vaults held two different valuations prior to
approval.
It would be three years before Mr and Mrs Y were given access to these
critical valuations and supporting documentation.
THE LVR SCAM (the intended mechanics)
The Purchase Price of the investment property was suggested as $449,000
and despite valuations also shown on the developer property analysis, as
being 100% LVR. The property had been over-valued by at least $100,000
One document showed the Land and House as having a value of $345,000
The Valuation by Real Estate Firm shows a possible value of $400,000 - Land

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$165,000 and Build $235,000 for the finished product.

Yet this document suggests: Valuer has had regard for the total package of
$439,000, however this is unable to be supported by sales evidence of
improved property in the area. There is very limited sales evidence in xxxxx,
particularly in the X Bay Estate at price levels in excess of $380,000.
Sales of established dwellings in this locality is very thinly traded,
particularly at prices in excess of $380,000. Development within the Bay
Estate has generally been slow since the first stage was marketed in approx
2000.
We are aware that property within this estate is currently being marketed
aggressively to non-local investors as House and Land Package deals.
These deals are offered with inflated vacant land contracts in conjunction
with building contracts.
The third document showing the purchase price at $100,000 above the
valuations the bank sought in its possession prior to approval.
On the receipt of these newly discovered bank files, Mr Y rang local agents
and the prices suggested in total became around $345 - $360k as maximum
achievable..even lower than the VG valuation. The debt had climbed to
over $489,000 as did the realisation they would lose their own home that
they had been on schedule to pay out and own their home in 2013.
The awful truth emerged showing the cover-up by the bank from day one.
The Bank KNEW and kept hidden from the customer the true value of the
property in a different state, from which the customer lived.
The bank KNEW the model as it was the engineer of the loan product and
the ARIP target market yet controlled the sellers via commissions, plans and
bonus structures. The Bank KNEW the actual truthful income of Mr and Mrs
Y, as they were the same bankers which the couple had used for years.

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Submission 69

The True LVR of this investment property was 139.7% and yet the bank
documents discovered later, had this figure tweaked down to 42 % LVR? Mr
and Mrs Y only recall seeing 3 pages of this 11 page document.
Hidden pages on files are standard industry practice.
The Purchase Price + the cost of the fees, the LMI and legal fees, plus the
buffer monies came to a total of $489,000 on a home worth no more than
$350,000 at the time Mr and Mrs Y were coerced into signing.
The Bank also knew the husbands income could not service the loan as Mrs
Ys small income was paying the existing mortgage and could not be entered
into, so that critical point appears on one page and not the other..
One year after approval Mr and Mrs Y were already struggling and the bank
assisted yet inflamed the debt with a topped up credit card. This normal
bank solution is to pay mortgages off on steroid rates. They then used the
superannuation to pay payments and keep the entire Ponzi structure from
immediate collapse.
The Real Estate Agents warning on the Valuation (hidden by the Bank): no
evidence to achieve. turned out to be true in substance, and in fact.
Bankers saw no reason to pass on this vital information to the customer to
give Mr and Mrs Y the best chance of making an informed decision.
TERMS OF REFERENCE 1 (b) The role of the property valuer
Certainly the valuers were providing banks with inflated valuations yet the
conditions explained the highly unlikely chance of achieving those figures.
TERMS OF REFERENCE 1 (c) The use of punitive clauses
Contracts were drawn up in such a way was to use the LVR as an excuse to
take action whenever customers started asking tricky questions re the
valuations.

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TERMS OF REFERENCE 1 (f) Extent to which borrowers are given an

opportunity to rectify a default event.
Borrowers have been tricked into trying to sell their own property, knowing
it will only end in a $100,000 average loss. Its another cowardly issue.
TERMS OF REFERENCE 1 (g) Provision of Reasonable Noticewhen loan is
required to be repaid.
Borrowers have seen offers of refinancing to remove the original bank
from the crime scene. That play is rife in the industry to frustrate the
existing legal remedies and also hides the criminal intent.
TERMS OF REFERENCE 1 (h) The appropriateness of the loan to value ratio
as a mechanism to default a loan.
Since the Banks are the engineers and creators of all these faulty products,
and for the sake of urgent CONSUMER PROTECTION at work, there needs to
be an URGENT ROYAL COMMISSION into Banking and Finance.
BFCSA Members HIGHLY RECOMMEND the following:
1) A ROYAL COMMISSION into the Australian Banking System and
Finance Institutions interconnected be sought by the Committee: as
trust in our banking sector has hit rock bottom.
2) That all original files of consumer importance be handed over to
consumers of engineered loan products as a matter of urgency, unredacted and unmarked commercially sensitive.
3) That all copies of bank held valuations be furnished to the borrowers
immediately.
4) That those whose files show foul advantage by Banks and criminal
intent to impair loans from day one, that the borrowers be
immediately placed back in a position as if they had never met the
banker or its agents.
CONCLUSION:

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There has to be a Chairman from the 19 Parliamentary Inquiries to date that

will now recommend in the consumers best interests: that A ROYAL
COMMISSION into BANKING AND FINANCE is held into these common
practices by bankers in dealing with low doc 30 year interest only subprime loans.
There has to be a wide Terms of Reference for a proper Royal Commissioner
to delve into Australian lending policies.
As more than 2000 people have attested in the past as to bad banking
behaviour on all levels, a Royal Commission is long overdue. The existence
of a Banking Cartel Operation is surely enough for decent Parliamentarians
to respond with one voice, no matter the politics.
The public deserve the truth as to what the banks are doing with lending
products and, how much profit comes from this criminal source of bad
behaviour. The powers of a Royal Commissioner (an ex HC Judge unrelated
to bankers) to ask the tough but necessary questions of these bankers, is
long overdue. These are no accidental nor are they isolated incidences.
Bad Banking Conduct is a multi-billion dollar industry.