Banking royal commission hears ANZ mortgages risk breaching responsible lending laws
Updated
ANZ effectively stands accused of breaking responsible lending laws by taking no steps to verify the living expenses declared by mortgage applicants.
Key points:
- 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
Senior counsel for the royal commission, Rowena Orr QC, 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 guidelines from the corporate regulator ASIC.
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 then 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 does not look at customers' account and transaction records to try and 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 Regulatory Guide (RG) 209 from the Australian Securities and Investments Commission (ASIC) 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 is probably still an accurate figure.
He also admitted that it reflects 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-three Australians spend more than that on those discretionary basic categories and one-in-four Australians would spend less than that."
Mr Ranken was either in error or misspoke in that response, as the 25th percentile means three-quarters of Australians spend more on discretionary basics and one-quarter less than the HEM.
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 the corporate regulator 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.
Topics: banking, royal-commissions, insurance, consumer-finance, consumer-protection, australia
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