ASIC's role and credit providers
Before July 2010, the states and territories had primary responsibility
for regulating consumer credit. ASIC, however, did have some involvement. Since
March 2002, under the ASIC Act, the regulator has had a consumer
protection role for credit facilities, which included household and investment
and small business credit. ASIC took over this responsibility from the ACCC as
part of the reform of business and investment regulation under the Corporate Law
Economic Reform Program.
This Commonwealth level regulatory function for credit in the marketplace was
limited in scope with ASIC's jurisdiction under part 2 of the ASIC Act confined
to broad standards of conduct covering unconscionable conduct and misleading or
ASIC's licensing powers did not extend to brokers who only advised on credit
products. At that time, as credit was not considered a 'financial product' for
the purposes of the Corporations Act, brokers were not required to have an Australian
financial services (AFS) licence.
In July 2010, ASIC's responsibilities expanded considerably under the National
Consumer Credit Protection Act 2009 (National Credit Act) which imposed
licensing requirements, general conduct obligations and responsible lending
obligations on credit providers and persons providing credit assistance.
In this chapter, the committee's main focus is on ASIC's performance and
its regulatory role before the National Credit Act came into force. It is
concerned with allegations of imprudent lending involving unconscionable
conduct, misleading and deceptive conduct, including possible cases of fraud,
that occurred after March 2002 but before the new legislation came into effect.
Early indications of irresponsible lending practices
The period from the late 1990s through to the first half of the 2000s
was marked by considerable product innovation in the Australian mortgage
market. Reflecting on that period, the Assistant Governor (Financial Markets)
of the Reserve Bank of Australia (RBA) explained that lenders sought to cater
for a wider range of potential borrowers and found new ways to assess their
borrowing capacity. He noted:
Lenders introduced home-equity loans, redraw facilities and
reverse mortgages, all of which allowed households to borrow against the equity
they have built up in their homes. Lenders also introduced interest-only loans
and shared equity loans, which made it easier for households, particularly
first home buyers, to purchase their home.
Loan products that better meet the needs of certain types of
borrowers, such as those with irregular income streams or those who do not meet
the standard lending criteria, were also introduced. Low doc loans, for which
borrowers self-certify their income in the application process, accounted for
about 10 per cent of newly approved housing loans in 2006 compared with less
than ½ per cent in 2000.
According to the Assistant Governor, while the overwhelming effect of
these changes had been to widen the range of households who could access
finance, some of the innovation had resulted in 'an easing in lending standards
and an increase in risk for both borrowers and lenders'.
The Consumer Credit Legal Centre (NSW) Inc (CCLC) also noted the
emergence of 'non‑conforming lending' in the home loan market during the
early 2000s. It stated that 'while some lenders specifically targeted and
priced their products for marginal borrowers, the trend soon spread into the
mainstream, with most mainstream lenders including the major banks offering low
Growing use of mortgage brokers
This period also witnessed growth in the use of financial brokers as
intermediaries between borrowers and lenders, which meant that an increasing
number of Australians approached mortgage brokers rather than a lender to
For example, a 2003 survey by the Australian Prudential Regulation Authority
(APRA) on broker initiated loans recorded that 56 institutions indicated that
they had used brokers to originate loans (14 banks, 34 credit unions, and eight building
societies), which represented approximately 25 per cent of all authorised
deposit-taking institutions (ADIs). The survey also predicted a continuation of
this trend in the market with 25 institutions indicating at the time that
they planned to use brokers for the first time in the next 12 months.
Based on its results, the survey noted that only a minority of
institutions were placing too much reliance on brokers to assess loans and
inadequately tracking and assessing broker-introduced loans. Even so, it
cautioned that independent loan review was necessary to ensure an ADI's credit
standards were 'being applied to assess and approve loans'. It advised that an
independent review should be 'a fundamental element of risk management'.
The survey also covered broker remuneration. It found that over half of
the institutions (53 per cent) based the broker's remuneration solely on the
volume of business generated. According to the survey reviewers, this provided
brokers with an incentive to generate loan volume without appropriate regard
for risk. Again, the reviewers observed that with such an incentive structure
it was critical for ADIs
to have procedures in place to ensure their own credit assessment standards were
applied rigorously to broker-introduced loans.
Looking back over this period, the CCLC stated that:
Brokers carried none of the default risk worn by lenders and
had a strong financial incentive (in the form of commissions) to get as many
and as big a loans as possible accepted by the financial institutions and other
lenders. The presence of the 3rd party in the transaction also allowed the
lender (keen to grab or retain market share) to distance themselves from the
transaction and to either genuinely miss, or effectively turn a blind eye, to
irregularities in loan applications.
As noted previously, ASIC assumed Commonwealth‑level
responsibility for consumer protection in the credit market in 2002 at a time when
the use of mortgage brokers was on the rise and lending practices were easing.
Early warning signs
During the early 2000s, community advocates and caseworkers began
to express concerns about the growing incidence of complaints involving
brokers. Their experiences led them to conclude that the industry was lightly
and unevenly unregulated and contained some high-risk players and unfair
In response to the increasing number of complaints involving brokers, ASIC, on
the recommendation of its Consumer Advisory Panel, commissioned the CCLC to
examine and report on the mortgage and finance broker industry.
Increasing concerns about broker
Consistent with the findings of the 2003 APRA survey, the CCLC also
registered some troubling trends about this poorly regulated sector of the
Its report identified a number of features that hindered the development and
maintenance of professional standards for broker conduct, including:
minimal or no entry requirements for participants in the industry;
the use of commissions as the dominant method of remuneration for
a shift in distribution channels used by lenders from branch
networks to brokers, with lenders competing against each other to gain access
to broker client bases, through increasing the commission they were prepared to
pay to brokers;
a consequent shift in the preparation of loan applications from
lenders to brokers, with some brokers prepared to provide inaccurate
information about the financial circumstances of their clients, in order to ensure
that loan applications met the acceptance criteria of the lender;
difficulties for lenders seeking to discipline brokers, due to
the capacity of brokers to switch the lender to whom they directed client
applications for finance;
a lack of accountability of brokers for poor advice due to the
inability of consumers to access alternative dispute resolution forums; and
some brokers not properly promoting the interests of their
The report recognised that consumers were relatively inexperienced when
using brokers and, given the confusing range of loans and providers, could
become dependent on brokers for advice. Importantly, the report noted that some
brokers were 'prepared to exploit that dependency' and that a number of fringe
players in the broker industry systematically adopted unfair practices, and
pursued 'their own financial interests over those of their clients'.
It cited cases involving disputes about the quality of advice provided by
brokers which included:
brokers recommending interest only loans in inappropriate
circumstances—case studies indicated that some brokers were making widespread
use of 'interest only' loans;
brokers misrepresenting the savings available from changing a
brokers arranging for borrowers to declare, incorrectly, that a
loan was for investment rather than personal use (with the result that the
consumer lost statutory protections provided under the Uniform Consumer Credit
brokers charging excessive fees, or fees in circumstances where the
broker was aware that there was little prospect of the borrower being approved
borrowers being placed into a loan where they could only afford
the repayments with substantial hardship (81 per cent of the caseworkers
surveyed by the CCLC who dealt with broker complaints indicated that they often
saw problems of this type); and
brokers arranging finance for an amount less than that requested
by the customer (particularly where the funds were required to complete a
The report noted that these practices resulted in 'higher costs to
an increased risk of default by the borrower, and exposure of their home where
this was used as security for the debt'.
It also suggested that most consumers would be unaware that by signing a
declaration that the loan was for investment purposes, and therefore outside
the UCCC regime, they made it significantly easier for the lender
to take possession of any security, such as their home, in the event of default'. The report drew particular attention to a most troubling practice:
A significant and, from a regulatory viewpoint, disturbing
trend in the broker industry is the incidence of fraudulent mortgage
applications. The shift in responsibility for the preparation of the loan
application from persons such as bank employees to brokers has seen a shift in
the interests of that person, from applying proper risk assessment techniques
to earning commissions through having the loan approved. Increased reliance on
brokers therefore creates an increased risk of this type of mortgage fraud.
At the soft end, mortgage fraud can involve the broker
misrepresenting the consumer's personal or financial information in order for
the lender to finance a marginal application for credit. Because brokers have
ongoing contact with a credit provider, they become familiar with its lending
criteria and can manipulate the content of applications to ensure the loan will
be approved. There are a number of ways in which the broker can camouflage the
borrower's circumstances, such as not disclosing all liabilities, reducing the
number of dependants, or inflating the value of assets.
The report recognised the urgent need for the implementation of interim
measures to protect consumers and improve standards of conduct in the broker
industry, which included:
increased and visible enforcement action by regulatory agencies;
the introduction of improved codes of conduct by industry bodies
together with greater monitoring and enforcement of their obligations;
improved access to industry-based dispute resolution procedures
such as the Mortgage Industry Ombudsman Scheme, and ASIC approval (pursuant to
Policy Statement 139) of the operation of such schemes, in order to provide
greater transparency in the operation and decision-making practices of these
state and territory governments encouraging a greater degree of
supervision of brokers by lenders...
A 2003 APRA discussion paper also highlighted the increased use of
brokers and recognised that some ADIs were relying on broker valuations and
income checking when providing a loan. Instead of verifying the information, certain
ADIs were placing greater weight on the security underlying the loan than the
ability of the borrower to repay the loan.
The paper referred to a particular problem with low doc loans
where the potential borrower did 'not provide income details', and the lender did
not 'verify the borrower's self-declared income levels and/or self-declared
Clearly, by the close of 2003 some persistent and undeniable alarms were
warning of dubious lending practices and the potential for them to spread,
especially with brokers receiving commissioned-based remuneration and with the
increasing availability of low doc loans.
Commentary on, and concerns about, the role and conduct of brokers continued
for the next few years. According to the RBA's September 2004 Financial
Stability Review, brokers typically received upfront commissions from
lenders for each loan they originated. It observed that most lenders also paid
brokers ongoing or trailing commission over the life of the loan, which were
generally 'small relative to upfront commissions'. The Review noted that
this created some incentive for borrowers to periodically refinance with a
In 2007, the RBA reported that mortgage brokers in Australia had been
under discussion for some time. It explained:
In part, this reflects
concerns that a small number of brokers may have been associated with predatory
lending practices and that their remuneration structures—predominantly high
upfront and low trailing commissions—might have adverse consequences for both
borrowers and lenders.
In September 2007, the House of Representatives Standing Committee on
Economics, Finance and Public Administration tabled a report on home loan
lending. Although the report noted the positive results stemming from changes
in the housing lending market, it also referred to negative aspects, including
instances where lending had been inappropriate. The report cited the concerns
of the Credit Ombudsman Service, which had identified:
...a disturbing trend among some lenders, normally fringe
lenders, to refinance home loans in circumstances where the borrower has no
capacity to repay the loan. These lenders rely solely on the value of the
security, not the borrower's ability to meet the repayments. The borrower is
invariably in default of their existing loan and is at risk of losing their
The House of Representatives' committee recommended that the
Commonwealth take responsibility for regulating credit including mortgages.
By 2008, widespread support for reform was mounting.
In March 2008,
the Council of Australian Governments (COAG) agreed in principle to the
Commonwealth taking over the role of regulating mortgage credit and advice
to protect consumers. The states' agreement to refer constitutional powers to
the Commonwealth paved the way for the introduction of the Consumer Credit Protection
Prior to 2008, ASIC had been aware of emerging problems in the mortgage
brokering industry, including predatory lending and the potential for it to
grow. As the years passed, the trend continued but the push for reform was not
sufficiently strong until 2008 when agitation for legislative change gathered the
to compel reform. Before the committee considers the effectiveness of the
it examines ASIC response to the problem of predatory lending as it crept into
mainstream lending after 2002.
ASIC's response to lending practices
In the following section, the committee looks closely at the nature of
this predatory lending, the effects it had on individual consumers, and why,
despite the warnings, such practices were allowed to continue. While the
committee acknowledges ASIC's limited regulatory function over the provision of
credit during this period, its focus nonetheless is on the measures that ASIC
could or should have taken to arrest the trend in predatory lending and to
protect the interests of retail borrowers.
The committee has previously inquired into poor lending practices as
part of its broader 2012 inquiry into the post-GFC banking sector. It took
evidence from people claiming that they had been the victims of predatory
lending. Ms Denise Brailey, who headed up the Banking and Finance Consumers
Support Association (BFCSA), asserted that fraud and maladministration,
especially related to low doc loans was prevalent. The allegations were serious
and went to matters such as the falsification of application loans.
During that inquiry, ASIC informed the committee that it had taken
enforcement action regarding low doc loans over a number of years and that it
had 'not identified widespread evidence of systemic misconduct in the banking
sector along the lines described by Ms Brailey'. At the time, the committee
expressed its concern about the obvious discrepancies between ASIC's account
and Ms Brailey's claims of predatory lending and fraud. It believed that the
matter warranted further investigation and that, upon receipt of allegations
that presented an arguable case of wrongdoing, ASIC should undertake its own
investigations to establish whether a prima facie case of fraud existed.
Following this suggestion, ASIC wrote to Ms Brailey requesting the
documentation she had referred to that would support her allegations of
misconduct. ASIC obtained and reviewed the documents provided by Ms Brailey but
considered that the material did not provide evidence of any breach of the law
According to ASIC, additional information posted on the BFCSA's website did not
provide evidence of breaches of the laws administered by ASIC 'or indicate that
any of the credit providers were aware of, encouraged, or inserted misleading
information in application forms'.
This current inquiry into the performance of ASIC provided another opportunity
for people who have suffered loss because of poor lending practices to recount
their personal experiences.
The committee received well over 160 submissions from people expressing
concerns about the conduct of brokers and lending institutions. Most provided
their own account of being caught up in poor lending practices and as a
consequence losing their family home, life savings, credit rating and in many
cases their health. A significant number of those who wrote to the
committee were approaching retirement or had retired. Their experiences align
with those cited in the CCLC 2003 report and are consistent with the findings
of APRA and the RBA around that time.
According to the BFCSA, older retirees and pensioners have been the
favoured target of white collar crime in Australia over the past two decades. In respect of irresponsible lending, evidence before the committee supports
this contention. For example, one couple, aged 71 and 64 years, had a loan of $900,000
approved. They asked how was it possible for the bank to approve such an amount
for 'a 30-year term to people of our advanced age when we were Centrelink
recipients earning $23,000 per annum combined'.
Another couple in their late 60s received a loan of $360,000.
These examples were not isolated cases of a person or retired couple receiving
an annual income of below $35,000 obtaining a considerable loan over a 30-year
One son noted that his father, on the pension of less than $30,000 a year and,
in his opinion, losing his faculties, was 'granted a loan of $300,000 to invest
in the stock market'.
Another retired couple on the aged pension obtained a loan in 2007 of some
$415,000 on a property and $209,000 on their home. They also received a
$165,000 buffer loan 'to provide some portion of the deposits, and then provide
a bit of capital to assist the loans'. In 2009, they got another loan from a
different bank to refinance another property. They explained:
We are now aged 75 and 68 and face the very real prospect of
losing our home as we have no income apart from the pension. We have sold our
shares, a car, spent our invested money and, where we were in a fairly sound
financial position with assets over $1.5m we now have about $250,000 in equity
and this is declining and we have no prospect of any improvement in our
situation and find ourselves in an overwhelmingly frightening position.
Another couple informed the committee that:
...we are about to lose our family
home and everything we have worked towards for over 40 years to secure a self-funded,
comfortable retirement. Instead, we are broken mentally and physically and are now
looking at a life of dependence on the old aged pension and an unnecessary
drain on the public purse (the very thing we have worked our whole lives to
In their words:
We thought and trusted our 'Professional' Financial Planner,
the Broker and the Lender on the understanding that they operated under strict
legislation and Codes of Practice in 'a very stable Australian Banking System'
as it was explained to us at the time. This misplaced trust has destroyed our
The loan offers were directed at people who could borrow on the equity
in their home or other assets. According to one couple who were 'spruiked into
buying investment properties for their retirement':
...we were 58 years old, we were asset rich and income poor
after 40 years of hard work, we owned our factory premises our business and
business equipment, savings and we had a small loan on our house. The banks
said we could afford these low doc loans...These loans were never affordable, our
income was exaggerated, our assets were overstated, our rental income was
overstated. At 58 we got 30 year loans, we would have to work until we were 90
years of age, there has to be something wrong. We used our savings, everything
we earned, buffer loans, selling our vehicles and equipment and after 7 years
of stress we cannot pay anymore, it was a transferral of our wealth to the
banks. This has happened all because we placed our trust in the banks, and ASIC
protects the banks.
While consumers have a responsibility to attend to their own interests,
a number of submissions spoke of unconscionable or misleading and deceptive
conduct on the part of brokers and lenders. Welcome Australia Limited told the
committee of the deliberate targeting of asset rich–income poor 'Australians
the intention of reaping financial gain that would invariably and knowingly
lead to the loss of the victim's home'. It referred to campaigns directed at
retirees, many of whom were living solely on the pension, enticing them to
mortgage their homes 'while offering them the world'. According to Welcome
The majority of these retirees have no idea as to the true
picture of what is actually taking place, for once they sign that contract the
money begins to flow, to the bankers, the financial institutions and the
property speculators, while the investor/retiree begins to witness the
dissolution of their asset, their family home.
Retired couples were not the only targets. One submitter stated that he
was 55 years old and had recently lost his job; even though the submitter
indicated in writing that he was unemployed, he was successful in obtaining a
Another was a newly widowed 56-year-old woman who was not working, receiving a
widow allowance and in poor health due to the stress and grief of losing a
partner, when she refinanced her mortgage with a major bank. She later
discovered that her income was recorded incorrectly in the loan application
form and stated that, had she been earning that amount, she 'would never have
had a need for a mortgage'. Arguing that the bank had taken advantage of, and
defrauded, her, she wrote:
Now aged 64, no longer a home owner for the first time in 34
years, robbed of a chunk of my rightful equity, not enough now to buy anything outright
unless miles away from family friends...
A third case, but again only one of many, was a single mother who was
studying and working part-time. She had been fortunate to have received an
inheritance which had allowed her to buy her own home and to feel 'fairly
secure'. She then explained:
I was naive about investments and finances and believed what
people with experience told me. I was told by a broker that I should invest in
property, which I did with a low doc loan. I now clearly realise that I was
never in a position to be able to pay back a loan as I did not have the income.
I now have massive loans, no savings and have mortgaged my house. Life is now a
struggle month to month to pay the loans.
A person on a disability pension, now forced to rent out her home and
live at her daughter's house, was among the many who wrote to the committee.
In some other instances, the banks approved unaffordable loans to people 'who
could hardly read and write' or who had a poor command of the English language.
Many of the people who wrote to the committee were clearly hard working
Australians who over their lives had built up a nest egg so that they could
support themselves comfortably in their retirement. As one couple remarked:
We have both worked all our lives in good jobs, paid our bills
and our taxes and raised our family, and had finally taken time out to relax
when we were approached with this bank scam. However, we were completely sucked
in by the scam and particularly when we were told the bank was the Commonwealth
which we had always associated with being a good Australian citizen.
Many asked the same question—how could they find themselves in such a predicament?
As one submitter put it:
How did I [end] up with $530K debt when I had no income when
Low Document Loan was approved to me...I will be facing a Bankruptcy as my house
is only worth $430K.
For some, there was a definite sense that the banks had betrayed them.
One submitter, who referred to herself as 'a loyal customer of 35 years', did
not suspect that the bank would take advantage of long standing customers.
Another common complaint involved the failure to inform the borrower
about the loan documents; important details of the loan structure; and how the
loan arrangements would or could affect the borrower's circumstances.
A most disturbing element, however, involved information contained in the loan
application forms being deliberately fabricated after the applicant had signed
the documents or in some cases signatures themselves being forged. Indeed, most
of the people who wrote to the committee about being the victims of predatory
lending also referred to forged loan application forms and the failure of the respective
lending institution to verify the information.
Falsified information included: inflated income details; over-valued and
over-stated assets; fake Australian Business Numbers (ABNs); embellished employment
details; and false income tax details. For example, one couple listed the
anomalies in their application:
Our actual total income has been changed and in fact
overstated by almost $200,000, contrary to documented proof that was provided
at the time, in the form of tax returns and other official documentation.
No dependants included. In fact we have 2 children both at
home, one at school.
The actual value of our assets has been changed and in fact
overstated, contrary to documented proof that was provided at the time.
The actual cost of our expenses has been changed and in fact
understated, contrary to documented proof that was provided at the time.
The actual cost of our expenses has been changed and in fact
understated, contrary to documented proof that was provided at the time, in the
form of official documentation.
According to this couple, after they had signed and submitted the
original documents to the bank, changes were made to the loan application form
by person or persons unknown to them and without their authority, permission or
A 73-year-old self-funded retiree and a permanent carer to his son
provided another example that typified the range and extent of falsification of
a loan application form:
My income was altered from about $34,000 p.a. to $75,000 p.a.
My 1999 Toyota worth about $6000 was valued at $25,000.
My employment record was false. I had retired in 1995 and
since then was never self-employed as a tutor as claimed falsely in the [loan
My superannuation and $325,000 in non-existent shares were
I have never had an accountant or ABN as claimed.
A Family Trust was fabricated and I have never been a sole
My home was overvalued by $100,000.
I had signed a different declaration. I never signed the
affordability statement/self-employment forms claimed to be held on file.
Again the submitter told the committee that the bank had 'never checked
details with me to prove that I could service the loan'.
Another couple told the committee that they were 'absolutely shocked' to find
that their details had been 'grossly falsified' and incomes 'hugely inflated'.
They believed that the alterations were made by the bank after they had signed
the forms. They explained further:
We never had contact with the bank as this was done through a
broker, if the lender had made just one phone call to us to check that these
details were correct the loan would not have been approved and we wouldn't be
in this position.
For some, this practice was 'incomprehensible' and that no 'sane person
would have continued with these loans had they been aware of the level of
tampering required to get them approved'.
One such submitter, who was receiving WorkCover payments, told the committee
that her employment details had been altered but that the bank did not 'bother
to collect any taxation returns to verify the income'.
Another submitter informed the committee that the bank had never contacted his
father's accountant to ascertain his financial position. He asked a question
posed by so many others:
Would it not be a financial provider's responsibility to
perform at least the most basic due diligence before providing a large loan to anyone,
let alone an 80 year old man?
One couple remarked that while the bank never phoned them or made
inquiries into their ability to repay the loan, it did go 'to great lengths to
get a valuation' on their property.
Another could not understand why banks could undertake credit checks but not
The committee suspects that there are many other people who, too
embarrassed or disheartened by their experiences, have not come forward to reveal
their own stories of improper lending practices. Indeed, the CCLC told the
committee that it used to see such cases with 'alarming regularity'.
Many of the people who contacted the committee spoke of their sense of deep
shame in succumbing to predatory lending. They felt humiliated and defeated by
the whole business, which commonly had dragged on for years, draining their
energy, damaging their personal relations as well as their physical and mental
One submitter spoke of the indignity in finding herself in such desperate straits:
I am ashamed of the position I am in because of bank approved
low doc loans, there is fraud and forgery on our low doc loans, these loans
ought to have been rejected, they were never affordable from the beginning, the
depression, the stress, the fighting with my family, all our life savings gone,
because of low doc loans.
A 64-year-old pensioner who at first declined to accept an offer of a
loan but subsequently was persuaded to borrow a much larger amount than
initially requested summed up his situation:
I am the victim of a Low Doc Loan which has sucked my life
away and placed me on the brink of suicide. The poverty, sadness, despair and
hopelessness which have been caused by my attempting to keep up repayments on a
Low Doc loan which should never have been granted are real, cruel and horrible.
Another stated that, on reflection, he was encouraged to think beyond
his circumstances. He realised that a more prudent decision, which he started
with, 'was to purchase an affordable property but was convinced otherwise by an
offer presented as a 'sensible and tax effective way to increase my
People spoke of having to live on the breadline just to try to repay the
money after having worked all their lives; paid their bills and taxes; and
raised their family.
The fear of losing their home was particularly alarming. One couple in their
late 50s stated they 'should be planning retirement not worrying constantly if
we will have
a roof on our heads next week or next month'.
One submitter, the sole carer of his son, feared that there would be no
financial support or home for him.
Many borrowers who wrote to the committee also felt let down by ASIC.
They believed that the system was unjust and consumer protection non-existent. One submitter noted:
I am left thinking that a consumer purchasing a domestic
refrigerator has more consumer protection than a bank customer negotiating a
loan over an asset that's taken a lifetime to acquire.
Another, who also argued that the Australian government appointed ASIC
to protect consumer interests against misconduct by the financial institutions,
stated that ASIC seems to be 'in bed with the banks'.
In numerous cases, borrowers argued they had mounted a strong case of
maladministration in lending but that when they contacted ASIC for assistance,
it failed to act on their complaint in any effective way.
Mr Timothy Chapleo voiced a common view:
If they cannot be of any real value in policing rogue
business and large organisations such as financial lenders and enforcing corrective
measures then what value are they in a role that should see them being able to
have some real ability to protect members of our society from unfair and bad
elements in business.
The few cases cited so far only hint at the extent of the problem and
the number of people who believe that they have been the victims of predatory
In many cases these people were desperate to stem the losses and salvage
whatever they could from the financial mess they found themselves in and in
particular to save or regain their family home. Their trust in the banking
system has been shattered and their confidence in ASIC as an effective
Loan application forms—anomalies
The committee has recounted the stories of many borrowers who found
themselves in dire circumstances because of irresponsible lending practices.
In account after account, submitters expressed their shock at discovering that
their forms had 'been manipulated to suit the purpose of the loan'.
The stories of altered loan application forms are hard to believe. The
reported extent of these manufactured application forms raises many questions
about why the practice was allowed to continue seemingly unchecked for so many
years. As noted earlier, a 2003 ASIC-commissioned report referred to this
matter as did both APRA in 2003 and the RBA in 2004. Yet the practice continued
for several more years until finally the states agreed to refer powers to the
Commonwealth and new credit laws were passed.
Many who obtained their loan through a broker indicated that the lender
did not contact the borrower to check the details in the loan application form
or take measures to verify the accuracy of the information. They claim that had
the lender done so, it would not have approved the loan.
Some were convinced that the banks were required by law to ensure the
affordability of the loan: that it was the bank's responsibility to confirm
that the information contained in the loan application form was accurate.
One submitter stated that the bank 'did not protect us by communicating with us
or checking any of the paperwork as a prudent lender would be expected to do...'
5.56 In this regard, it should be noted that the 2003 Code of Banking
Practice states clearly that before a bank offers or gives a credit facility,
or increases an existing credit facility, it would 'exercise the care and skill
of a diligent and prudent banker' in selecting and applying credit assessment
methods and in forming an opinion about the borrower's ability to repay it.
It would appear that in most, but not all, cases before the committee,
it was the broker who altered or inserted incorrect information in the loan
application form. Many of the borrowers argued that the broker did not act on their
behalf but was in effect the agent of the bank. In their view, the lender paid
the broker, who often had access to the lender's computer systems, and 'was
instructed by the lender on how to get various loans across the line and operated under the lender's systems
Ms Brailey cited the use of a service calculator as evidence that brokers were
indeed agents of the banks. She stated:
I want to highlight that everything is predicated on a
service calculator... All 11,000 brokers have a screen in front of them. They
must put the base income in the top corner. At the bottom, it spits out a
figure. The broker is then taught by the business development managers at bank
level. They come out to your office and teach you how to use it. They ask the
broker to write that figure on the loan application form in their own
handwriting. So he or she writes $180,000, when the figure was $50,000. That,
in a nutshell, is how that fudged figure emerges.
The service calculator is a tool—it is a weapon.
ASIC argued, however, that ultimately the person who entered the
incorrect information or tampered with the loan application form was the one
responsible for the act:
If an individual, whether a finance broker or a borrower,
falsifies information in order to make a loan fit a calculator, it is the
individual who has engaged in misconduct, not the person who has made the
That is, the lender was not held responsible for the misuse of the
calculator by the broker, even though the lender may have supplied the
calculator and provided advice and instruction on its use.
While the courts have tended to accept that brokers were not agents of
the banks, the lending institutions do not come out of this period blameless.
The banks and other lending institutions must have been aware of the dubious
practices employed by some of the brokers arranging loans but chose to ignore
them. Moreover, in some cases, the lending institutions clearly failed not only
to exercise the skill and care of a diligent and prudent banker but were
negligent even complicit in deceiving their customers. It should be noted that
in its 2009 report on financial services and products, the Parliamentary Joint
Committee on Corporations and Financial Services expressed some doubt about the
degree to which banks acted 'ethically, appropriately, morally and prudently in
their decisions to grant loans to some Storm customers'.
It would seem that on the face of the evidence, some lenders, irrespective
of the loan application form, should not have approved certain loans: they were
unaffordable and likely to fail. In other cases, again irrespective of the loan
application form, the borrower should have taken care before signing the actual
loan contract to make sure that the repayments were sustainable and would not
jeopardise the assets securing the loan.
Even so, the fact that this practice of manipulating information and
faking signatures was allowed to continue for so long reflects badly on the brokers,
the lenders and the regulator. It highlights the vulnerability of unwary and
trusting borrowers, who were taken advantage of by unprincipled and
self-interested brokers and lenders.
ASIC's role and limitations
Many submitters were of the view that the regulator did little to
prevent predatory lending. ASIC informed the committee, however, that it made
'strategic use of the jurisdiction it did have'. It took court action; provided
guidance to industry in areas where practice was poor; developed resources,
tools and information for consumers of credit; and undertook surveillance
activities where it saw problems in the industry. Moreover, ASIC endeavoured to
understand the causes and effects. For example, ASIC took the following action with regard to deceptive and
2004—accepted an enforceable undertaking from mortgage broker
2006—took civil and criminal action against mortgage broker
Tonadale Pty Ltd and Kelvin Sheers;
2006—obtained orders against mortgage brokers Sample &
Partners Pty Ltd; and
2009—took action against Whyte Corporation Pty Ltd.
As well as citing these few cases, ASIC drew attention to the difficulty
of bringing the lender to account for the misconduct of the broker. It noted
that ASIC intervened in the Tonto Home Loans Australia Pty Ltd matter to argue
that, 'in the circumstances, the brokers should be considered agents of the
lender and that the actions of the lender were unconscionable'. The courts did
not accept ASIC's submissions. ASIC explained:
The Supreme Court of New South Wales Court of Appeal
ultimately held that the broker was not the agent of the lender and, as a
result, that the lender's conduct was not unconscionable, but that the relevant
contracts were unjust under state legislation.
ASIC informed the committee that:
The courts have found that, barring special circumstances, a
mortgage broker is the agent of the borrower, and not the lender. This poses
significant challenges for establishing unconscionable conduct where a broker
is involved in the transaction, because:
the broker's actions are
attributed to the borrower. For instance, if the broker has manipulated the
loan application, unbeknownst to the borrower and the lender, the action is
taken to be that of the borrower, and not the lender; and
the knowledge of a broker cannot
necessarily be imputed to a lender. In these circumstances, as the lender
typically deals with the broker and may not have any direct contact with the
borrower, it is difficult to establish that the lender has sufficient knowledge
of the borrower's circumstances for the lender's conduct to be unconscionable.
It appeared to ASIC that dishonest or fraudulent conduct had been 'more
commonly found in relation to mortgage and finance brokers rather than lenders'.
The committee was told, however, that even where bank offers were alleged to
have fabricated the loan forms, ASIC was reluctant to take action.
In specific reference to the provision on unconscionable conduct in the ASIC
Act, ASIC explained that as the provision covers a broad range of situations, the
courts have 'generally applied it
to address the most extreme classes of conduct in all cases'. It explained
...the prohibition therefore does not provide a nuanced remedy
that addresses the complexities of a transaction where problems may arise
because of the different interests of a consumer, a provider of an investment
product, a lender and any finance broker.
ASIC noted further that borrowers who elected to pursue matters in court
faced the same barriers as ASIC in establishing that a lender's conduct was
Additional difficulties borrowers could face when taking action against the
broker were also recognised by ASIC:
Although a borrower may have a remedy against a finance
broker for unconscionable conduct, the ability to obtain such a remedy, and
value thereof, may be reduced in circumstances where the borrower is in
financial hardship, due to an inability to repay the loan, and may be facing
separate enforcement or legal action in relation to their home.
Thus, under the laws that existed before 2010, the people who were deceived
by their brokers and abandoned by their lenders, had little prospect of success
the courts even though a lay person would clearly have understood the conduct
of the broker or lender as unconscionable.
As mentioned earlier, most complaints centred on the loan application
form and the inaction by ASIC to deal with what the complainant considered was
blatant fraud. In responding to alleged fraud occurring before the commencement
of the National Credit Act, ASIC advised that the relevant state and territory
police forces were the 'more appropriate authorities to investigate'. It noted
that state and territory police had investigated some matters.
ASIC stated further that it appeared that dishonest or fraudulent conduct had
been 'more commonly found in relation to mortgage and finance brokers rather
Guidance, education and warning
ASIC also informed the committee that it offered guidance for consumers
through financial literacy material available on its website on managing credit
and loans and debt. It also worked with industry, consumer groups and the
external dispute resolutions schemes to improve practices. ASIC cited its work
the development of a code of practice applicable to brokers and
non-bank lenders; and
enhancements to the codes of practice of both the banking
industry and mutual sector.
As noted earlier, however, the banks already had a Code of Banking Practice
requiring them to 'exercise the care and skill of a diligent and prudent banker'.
ASIC had available to it persuasive and less formal measures to stop
unscrupulous practices. In this regard, the committee believes that ASIC did
not take the opportunity to intervene in a far more direct and public way. It
did not send a strong message regarding its concerns about irresponsible
lending practices to lenders. Nor did ASIC do enough to alert Australian
consumers to the risks associated with low doc loans, their vulnerability to
irresponsible or even fraudulent activity, and of the need to protect their own
interests. Such early and decisive publicity may have educated the community
about ASIC's limited ability to protect their interests and minimised the
Individual complaints and ASIC's responsibility
The CCLC argued that the role of a large national regulator is 'to
respond to systemic and serious breaches of law within the industry that it
regulates'. According to the CCLC, the expectation that ASIC would investigate
and take action in complaints prior to the new credit laws was 'unreasonable':
ASIC cannot be expected to resolve each individual consumer
dispute, nor would it be in the public interest. ASIC should carefully consider
how to respond to all potential breaches of the law, but should not necessarily
undertake a formal investigation of every individual complaint that comes to
Furthermore, the CCLC highlighted that even in the face of 'extensive
poor conduct' in lending in Australia, the laws then were limited and cases
...prosecuting a case in relation to the conduct of an
individual entity under the ASIC Act (without the credit laws) is a resource
intensive exercise and will not necessarily result in the players being banned
from the industry now. It will certainly not turn back time, nor enable consumers
to keep assets they could not afford in the first place, or to retain assets
used for security when the funds have been expended for the consumer's benefit.
According to the CCLC, 'expending resources investigating conduct that
has already been identified as a problem and has been the subject of major law
reform is also clearly of limited value'.
The committee understands that ASIC's role between 2002 and 2010 when
the new credit laws came into force was limited. The fact remains, however, and
is a potent lesson for the regulator, that despite all the warning signs, ASIC
remained in the background while borrowers found themselves exposed to
unscrupulous lending practices and at risk of losing their homes and life
The committee understands that ASIC receives a large number of
complaints and reports of alleged wrongdoing and that it cannot possibly deal
with such a large volume of individual complaints. But it also believes that
individual complaints can provide early markers of a broader problem that ASIC
should monitor and address.
In this particular case of irresponsible lending, each single complaint was
symptomatic of a more widespread and growing problem.
The one compelling lesson to be learnt from the many cases of predatory lending
that occurred between 2002 and 2010 is that ASIC must be more proactive and
more assertive in stepping forward and exposing poor practices as soon as they
surface. The committee concludes that ASIC should have done more to:
alert the public to the dangers of irresponsible lending and of the
practices of some brokers that put their clients' interests at risk;
inform consumers about the need to protect their interests when
entering into a loan: to make sure that it was affordable and warn them of the pitfalls
of particular loans such as low doc loans;
educate the public about the importance of requesting and reading
key documents and the dangers of signing incomplete documents;
identify that a systemic problem was emerging or already
entrenched in the industry that needed decisive action to prevent further
take a stand against and investigate fraudulent activity such as
the allegations of doctored loan documents including forged signatures and
fabricated information, and of possible unconscionable conduct (enticing
vulnerable people to take out unaffordable loans);
engage the banks in serious conversation about their duty to
'exercise the care and skill of a diligent and prudent banker', as stated in
subsection 25.1 of the Code of Banking Practice, and urge them to adhere to
join forces with ASIC-approved external dispute resolution schemes
to combat the misuse of loan service calculators and loan application forms,
and any behaviour in the credit industry that went to unconscionable conduct;
improve the way it conversed with borrowers who were seeking the
Some recommendations that would have flowed naturally from the evidence
presented in this chapter have been made redundant by recent reforms. There are
others, however, that remain relevant but are developed and appear in later
chapters. Noting ASIC's existing work on financial literacy, the committee, for
the moment, makes the following recommendation.
The committee recommends that ASIC develop a multi-pronged campaign to
educate retail customers about the care they need to take when entering into a
financial transaction and where they can find affordable and independent advice
or assistance when they find themselves in difficulties because of that
New credit laws
Due to the national credit reforms implemented in 2010, many of the
unscrupulous practices identified in this chapter should now be unlawful and
people involved in the provision of credit, including intermediaries such as
brokers, subject to tighter regulation. In the following chapter, the committee
considers the new credit laws and their effectiveness in protecting consumers
from irresponsible lending practices.
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