Improved transparency and oversight will reduce fraud: FBAA

The Federal Circuit Court of Australia passed down its judgement in the King v PIA Mortgage Services Pty Ltd (PIA) case on Wednesday (12 December), in which it outlined that PIA had contravened two provisions of the Fair Work Act. 

While the matter related to breaches of employment law, Justice Smith’s judgement detailed multiple issues relating to the mortgage broking side of the company, Zenik Finance Solution Pty Ltd (Zenik), which later changed its name to Fame Finance Solution Pty Ltd. 

Specifically, the judgement detailed several instances of Zenik broker loan applications from 2016 that allegedly contained fraudulent documents. These largely pertained to fabricated letters of employment and undisclosed debts for foreign buyers. 

The brokers that admitted to breaching responsible lending laws were summarily dismissed, while other brokers resigned. 

Speaking to The Adviser following a series of stories that broke in Fairfax Media outlets relating to reported fraud involving false bank statements and verification of income for overseas buyers, Finance Brokers Association of Australia (FBAA) managing director Peter White said that it was important to note that the case was not representative of the whole broking industry. 

Mr White said: “Firstly, we have to put it back into perspective. This happened a while ago and it is very much a niche market issue. It was targeted within the Chinese community and I’m very cautious that mainstream media will take this to be a systemic issue impacting the whole industry, which it is simply not. This is an isolated situation that is clearly disgraceful.” 

The head of the FBAA added that verification of borrower income for overseas buyers can be “extremely difficult” and that several lenders had drastically reduced their appetite or stopped servicing loans that relied solely on overseas income completely. 

“But this is relevant to past behaviour, not how it is today,” he said. 

“Today, there are lenders, aggregators and brokers that still do this form of lending, and the ones that are doing it properly have engaged Chinese banks to do the validation and verification of income through their credit policy systems,” he said. 

“So, by using banks under their regulatory policies and credit polices from that country and then ensuring that that marries into our requirements here in Australia (and, in some of the cases that I’m aware of, it far exceeds what we do here to validate income and verification here), it still is a valid form of lending if you can do it right and ensure that verification.” 

CIF working on improving oversight

Mr White noted that mainstream media had been asking questions about lender and aggregator oversight of the loans, adding that the industry was already working together to improve oversight and transparency. 

The head of the FBAA noted that ASIC Review into Mortgage Broker Remuneration had recommended that lenders actively monitor consumer outcomes, provide consistent reporting to aggregators, and a consistent processes to identify each broker and broker business.

Further, he noted that it called on aggregators to require lenders to provide that consistent reporting, as well as actively monitor consumer outcomes (including those relating to loan pricing, features, clawbacks, refinancing and default rates, and distribution of loans among lenders) and retain this information in a way that can be provided to ASIC to allow it to review outcomes across the mortgage broking market.

Specifically, Mr White highlighted the work of the Combined Industry Forum (CIF) in working to improve the “governance and oversight of mortgage brokers to identify and rectify issues and ensure continuous improvement”.

This work is expected to be finalised by the end of 2020.

Mr White said: “Trust in documentation is something I speak about all the time, and it was something that came up in the [financial services] royal commission. You only get the trust if you are transparent with the truth. Without that, there is no trust. So, the key is, at the very base level, complete and utter transparency. Regardless if you are writing loans for those here, or for unique niche market lending from banks overseas, that transparency piece is what helps you determine what the truth is.”

The FBAA MD continued: “Transparency and greater aggregator oversight of their brokers was part of the ASIC recommendations in their remuneration review, and the industry is rolling that out through the work of the Combined Industry Forum, and we are working with aggregators and lenders on getting better oversight.”

He added that it was likely that aggregators may increase their auditing processes of loans as part of this work.

Mr White concluded: “I think what we have to be cautious of is taking an isolated problem from a very niche market and trying to extend that across the rest of the industry. I don’t think that is necessarily the right thing to be doing. But we agree that there can be no opacity in the loan transactions or documentation verification processes. We need complete transparency.”

The judge ordered PIA Mortgage Services and Yue (Justin) Wang to pay $100,000 plus interest to the applicant, with the company paying an additional $10,384.48 plus interest to the applicant. 

[Related: ASIC focusing on loan fraud within banks]