‘Banks cannot discharge legal obligations to brokers’, says lawyer

According to the Credit Ombudsman Service, the borrowers faced financial ruin as a result of “unconscionable conduct” by Money Choice. The company has since had its credit licence stripped while its director, Matt George, was banned from credit activities for eight years.

However, the program suggested that several loans submitted by Money Choice should not have been approved by the banks in question in the first place. 

It noted that NAB’s response “placed the onus back on its customers”, highlighting that a statement from NAB said: “The customers were required to review, sign and return these papers, declaring them as being complete and accurate. They did so.”

In response to this, barrister James Wheeldon told the ABC: “Banks cannot discharge their responsible lending obligations by saying: ‘A mortgage broker did it; therefore, we’re not responsible’.” 

Speaking to The Adviser about the responsible lending obligations, Mr Wheeldon said that he was “a little bit surprised” that the banks were suggesting this because the law is “pretty clear” that the responsible lending obligations fall on the credit assistance provider, which would be the mortgage broker and then the credit provider itself (the lender). 

“So, for a bank to say that the ‘mortgage broker did it; therefore, it is not our responsibility’ — that just doesn’t fly,” the barrister said.

Mr Wheeldon elaborated that the only situation where a lender can rely on the broker’s submission is if they are “able to show that they had procedures in place and supervised what the mortgage broker was doing, had directives to the mortgage broker as to how they are supposed to do the verification, and had procedures to double-check the verification (for example, randomly sample the files that came through and check the value of the property that was to be acquired and double-check everything relating to the applicant and so on)”. 

He told The Adviser: “If you had all those procedures in place and somehow the mortgage broker was defrauding the bank or doing something dishonest, and despite the best efforts of the bank to verify this it still slips through, then maybe the bank could pivot on the mortgage broker.

“But there is nothing in the [National Consumer Credit] Act that says the bank can delegate that responsibility to the mortgage broker.

“The bank has individual obligations to make sure that everything is above board.” 

Lenders and brokers “need to get their house in order” 

The issue of responsible lending obligations has been in the spotlight recently, with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry suggesting in March that ANZ was “non-compliant with the National Credit Act, responsible lending obligations and with regulatory guides issued by ASIC” by not verifying “inconsistent” living expenses. 

Mr Wheeldon added that he believed the practical outcome of the royal commission will be a “renewed focus on responsible lending”. 

“Banks and mortgage brokers alike need to get their house in order,” the barrister said. 

The lawyer, who has formerly worked in the Regulatory Policy Branch of the Australian Securities and Investments Commission (ASIC), highlighted that ASIC can compel mortgage brokers to hand over their documents and to answer questions about how they conduct their business and verify customer-derived information. 

“The statute says you have to make reasonable enquiries into the borrower, what their purposes are, whether they are going to be able to repay it. Whether you are the broker or whether you are the lender, you’ve got to have procedures in place to make sure that what you are doing is reasonable and appropriate in the circumstances.

“The takeaway for this — whether you are a bank or a mortgage broker — is that you have got to have procedures in place. You need demonstrable procedures in place, formal policies that are backed up with paperwork that you retain, in order to show that you have undertaken those reasonable steps to verify the information that is coming in regarding the purpose, the borrower’s assets, the borrower’s ability to repay, income, etc. 

“Because if you do not give ASIC satisfactory answers that show that you do verify the information and you have procedures in place to verify that, and it is all documented, it is absolutely trivial for ASIC to say you are not complying with the laws or not understanding them and you will be sidelined [i.e. banned for a number of years].”

He added: “So, for the banks to say, ‘I relied on the mortgage broker’ — that doesn’t fly. But it also goes in the other direction: if a broker is in trouble with ASIC, it is not going to help at all to say, ‘The bank is as guilty as I am’. You have to satisfy your own obligations.”

The FJC barrister warned brokers that it was also “a lot easier for ASIC to go after a mortgage broker than it is for [them] to go after a bank (with all the resources that banks have)”.

“Mortgage brokers should be very careful. They should take great pains to avoid ending up as one of ASIC’s statistics that is presented to Senate estimates and put out in ASIC’s annual report as to the number of mortgage brokers that they have banned.” 

He concluded: “Mortgage brokers and banks alike are on notice that they absolutely have to get these procedures right.” 

As such, Mr Wheeldon recommended that all brokers and lenders refer to ASIC’s regulatory guide 209 Credit licensing: Responsible lending conduct to ensure that they are familiar with the specific obligations that both they, and lenders, are subject to. 

[Related: Commission analyses expenses and benchmarking]