The banking royal commission has kicked off its second week by interrogating executives from ANZ and Commonwealth Bank.
- ANZ does not verify customers' declared expenses
- Nearly three-quarters of ANZ home loans rely on a household expenses benchmark
- Westpac is currently in court for allegedly breaching responsible lending laws over its use of the same expenses benchmark
In the morning, ANZ stood accused of breaking responsible lending laws, by taking no steps to verify the living expenses declared by mortgage applicants.
Later CBA came under fire for aggressively selling credit card insurance to pensioners, students and unemployed people who did not meet the eligibility requirements to make a claim.
CBA admits under-reporting scale of problem
CBA's head of retail products Clive van Horen admitted the bank breached its reporting obligations to ASIC, under intense questioning by counsel assisting the commission Rowena Orr QC.
He initially denied the bank misled the corporate regulator back in 2015, when it significantly under-reported the number of people to whom it sold credit card insurance which they could not claim on.
The commission heard CBA notified the regulator of only 27,800 customers being affected.
This was despite the bank's internal review finding the true figure was more than double, at 64,000.
Mr van Horen conceded that was a "breach … of our obligations to act honestly, efficiently and fairly".
The terms of CBA's policy stated that people could claim the insurance if they lost their job and were unable to repay their credit card bills.
However, that required them to have been employed prior to making the insurance claim.
"We certainly failed to take what I would consider today to be reasonable steps," Mr van Horen conceded.
"There was some disclosure, but I don't believe that disclosure was adequate."
ANZ not lending responsibly
Earlier Ms Orr put it to ANZ's general manager of home loans and retail lending Will Ranken that the bank was falling short of responsible lending laws and ASIC guidelines by failing to verify the living expenses declared by mortgage applicants.
Ms Orr pointed out that the National Credit Act "prohibits ANZ from entering into a loan with a customer without making reasonable enquiries about the customer's financial situation and taking reasonable steps to verify the customer's financial situation".
"You don't do anything to verify what the broker tells you about the customer's expenses, you don't do anything to check that that information accurately represents the customer's expenses?" Ms Orr asked.
"Their general living expenses, no," Mr Ranken responded.
"So when the customer's expenses are inconsistent with bank statements that ANZ holds, you don't think that it's necessary to take further steps to deal with that inconsistency?" Ms Orr continued.
"No, not necessarily," Mr Ranken responded.
'Our processes are we do nothing': ANZ
ANZ's head of home loans and retail lending later elaborated on how little the bank does to verify customers' declared expenses, despite being required to verify a customer's financial situation.
"Our processes are we do nothing. There are transactions on those statements that are inconsistent with the statement of position and we don't do anything," he told the commission.
"Do you think that's satisfactory Mr Ranken?" Ms Orr asked.
"I personally do, yes," Mr Ranken replied.
When asked why ANZ did not look at customers' account and transaction records to try to verify spending, Mr Ranken said it would be difficult.
"We're talking about the manual review of paper-based bank statements and to use those to verify customers' statement of position, particularly general living expenses, would be highly complex, very time-consuming, very costly and, ultimately, not necessarily that helpful," he said.
This is despite Commissioner Kenneth Hayne having already made the following observation:
"An available point of view is that there's a trade-off between administrative convenience and obeying the law."
Mr Ranken also cast doubt on ANZ's compliance with ASIC's Regulatory Guide (RG) 209 about responsible lending standards.
"There's aspects of it that I, personally, still wonder how it would be possible to operationalise to the letter that they've got there," he said.
Mr Ranken denied the bank was in breach of either set of rules, but acknowledged that ANZ was trialling some steps to improve its verification of expenses.
ANZ still relies on HEM benchmark to test most loans
ANZ uses the higher of the customer's stated expenses or the Household Expenditure Measure (HEM) to test whether customers can afford their mortgage repayments.
However, 73 per cent of mortgage files tested by KPMG during a review used the HEM benchmark, and Mr Ranken admitted that was probably still an accurate figure.
He also admitted that it reflected a below-average level of household spending.
"The HEM that's currently used is based on the 50th percentile or the median average of that category [absolute basic expenses]," he said.
"So 50 per cent of observations are above that number and 50 per cent are below that number.
"With the discretionary basics, we take the 25th percentile, so … one-in-four Australians would spend less than that."
For that reason, ASIC has characterised HEM as a "conservative" measure of expenditure, but Mr Ranken was reluctant to be drawn on the bank's opinion.
"ANZ has a view that you could improve the level that the HEM benchmark's been set at, yes," he finally admitted.
"Improve in that it should be higher?" Ms Orr asked.
"Yes, different components of it, yes," Mr Ranken replied.
Westpac is currently fighting a court case brought against it by ASIC, which alleges its use of the HEM to approve home loans breached responsible lending obligations.
Loan to pensioner may have breached credit laws
As an example of the risk that some ANZ loans might breach responsible lending obligations, counsel assisting asked Mr Ranken about the case of pensioner Robert Regan, who gave evidence to the commission on Friday.
The 72-year-old widower, who lives with an acquired brain injury, took out a $50,000 ANZ loan over his house through a mortgage broker after his wife died.
Mr Regan took out the loan after being targeted by an online romance scam.
The pensioner was 71 at the time the 30-year mortgage loan was issued last year, yet the bank seemed to have little concern about the fact that he would be over 100 by the time he would finish paying off the loan.
Ms Orr read out part of the assessment notes from the ANZ banker involved in approving the loan, under a heading of "exit strategy".
"Applicant can downsize if required and pay out the loan," the banker noted.
Under the National Credit Act, a consumer is considered to suffer "substantial hardship" if they would need to sell their home to make their loan repayments, meaning such a loan would breach the law.
"But this appears to be exactly what the ANZ staff member is contemplating when assessing whether or not Mr Regan could make his loan repayments?" Ms Orr asked.
"Yes it is, I understand there might be reference to that type of an appropriate exit strategy in RG209," Mr Ranken responded.
However, it appears that Mr Regan was not warned that selling his home might be the only way to pay off the loan.
"No one at the bank talked to Mr Regan about whether it would be acceptable to him to have to sell his home to make the loan repayments, did they Mr Ranken?" Ms Orr asked.
"No they didn't, and that's the process deficiency that we're fixing," Mr Ranken responded.