A submission to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has taken aim at “unscrupulous brokers” and “irresponsible lending”.
In the first royal commission submission to be released to the public, the Consumer Action Law Centre (CALC) said that there was “systemic irresponsible lending in the car finance market”, suggesting that fraud from brokers in this sector was also a risk.
Noting that a fifth (1,098) of CALC’s phone calls from consumers in the 2016–17 financial year had been about car problems from consumers and community workers in Victoria, “more than any other consumer product category”, the group said that nearly 30 per cent of those phone calls related to car loans and motor vehicle repossessions.
“The volume of complaints relating to motor vehicles not only reflects systemic problems with car lending, but also the critical importance of motor vehicles to consumers,” CALC said.
It opined that there “is systemic irresponsible lending in the car finance market, particularly for vehicle purchases by low-income and disadvantaged consumers”.
CALC highlighted several ASIC cases where brokers had been found guilty of fraud (and ANZ recently agreed to pay $5 million in penalties after its former finance subsidiary Esanda approved suspected fraudulent car loans from brokers).
The submission continued: “While some consumers approach lenders directly to apply for a car loan, it is common for an intermediary (usually the car dealer) to ‘broker’ a loan at the car yard as part of the sale process.
“In our experience, brokers often complete loan application documents and liaise directly with lenders without borrowers having any contact with the lender. This gives rise to significant risks for irresponsible lending and, in some cases, fraud.”
Warning over “unscrupulous brokers”
While the consumer group did not target the broking industry as a whole, it did shine a light on “unscrupulous brokers” that may not be acting responsibly.
CALC suggested that the growth of the “gig economy” (i.e. collaborative consumption models such as ridesharing and delivery services) has meant that “the line between business and consumer credit has blurred”.
The consumer group wrote: “Unscrupulous brokers and lenders have taken advantage of this lack of clarity by pressuring or suggesting that consumers take out ‘business’ loans to avoid licensing requirements and complying with the protections offered by the consumer credit laws.
“While this misconduct currently appears to be limited to non-bank fringe lenders (which appear to fall outside the commission’s terms of reference), these practices can be promoted by brokers (intermediaries between borrowers and lenders, which are included in the terms of reference).”
Another area that the consumer group highlighted as being problematic was property spruiking, which it says had been “blighted by misconduct”.
“Entities involved in this sector may or may not have an Australian Financial Services Licence (AFSL), so some entities may be considered outside the scope of the commission’s terms of reference. However, some of these entities may be engaging in unlicensed financial services or be related to mortgage brokers, financial planners or introducers.”
Consumer Action said that it had assisted multiple people who had been “financially ruined by purchasing properties from people employing rent-to-buy or vendor finance strategies such as those spruiked by… brokers [who] typically target people who could not otherwise buy a home because of their income, savings or credit history”.
“They often operate without AFSLs and do not comply with other regulations (for example, for real estate agents),” CALC added.
Irresponsible lending in the focus
However, the main crux of the submission to the royal commission centred around lenders — and specifically, “irresponsible lending”.
The group wrote: “Irresponsible mortgage lending can have severe consequences, including the loss of the security of a home.
“Consumer Action’s experience is that older people are at significant risk, particularly where they agree to mortgage or refinance their home for the benefit of third parties. This can be family members or someone who holds their trust. A common situation involves an adult child persuading the older person to enter a secured loan/mortgage contract as the borrower and assures them that they will make all the repayments.
“The lack of appropriate inquiries into the suitability of a loan only comes to light when the adult child defaults on loan repayments and the bank commences proceedings for possession of the loan in order to discharge the debt.”
CALC also reiterated growing concerns that the Household Expenditure Measure (HEM) is not a robust enough living expense test, stating: “The use of ‘benchmarking’ by major lenders when undertaking affordability assessments is a significant problem and risks breaching responsible lending laws.”
The group went on to voice concern over the adequacy of interest rate buffers in affordability assessments, suggesting that there are “significant variations in the approach lenders take to including appropriate buffers” and reports that a third of interest-only borrowers do not know they have this type of mortgage, “raising concerns about the adequacy of communication and disclosure at the point of loan entry”.
CALC concluded: “The combination of these issues means that much of the harm caused by irresponsible lending in the home loan sector is yet to come.
“Should interest rates increase, many people who have entered into loans where affordability assessments have been inadequate are likely to find themselves unable to make repayments.”
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