The HEM is a statistical benchmark, and regulators worry it is lower than many customers’ actual expenses, which could leave borrowers vulnerable if interest rates rise.
Ms Orr quoted from the EY report, which said: “During our analysis of the portfolio data it was noted that a significant volume of customers had reported general living and entertainment expenses within their loan applications that were effectively equal to HEM or within 0.5 per cent.”
Ms Orr put it to NAB’s head of consumer lending, Angus Gilfillan, that the report showed mortgage brokers were “bypassing” a key check within the bank.
“Where brokers substitute a customer’s expenses with HEM, they are bypassing one of NAB’s primary serviceability controls, do you agree that that is the effect of this conduct?” Ms Orr said.
Mr Gilifillan replied: “Yes.”
The commission also heard that NAB’s chief risk officer, David Gall, last September wrote to the Australian Prudential Regulation Authority acknowledging its concerns about use of the HEM index.
Mr Gilfillan said banks had formed an industry working group to improve how they assessed customers’ expenses. Commissioner Kenneth Hayne observed banks could risk losing business to rivals if they moved first in adopting a tougher stance towards assessing customers’ living expenses.
“There would be a first mover penalty, wouldn’t there, Mr Gilifillan?” Commissioner Hayne said.
Mr Gilfillan’s appearance followed an extended questioning of NAB’s head of broker partnerships, Anthony Waldron, over a scandal that involved fraudulent loans being submitted through its “introducer” scheme, and an alleged bribery ring in western Sydney.
Ms Orr questioned Mr Waldron on how incentives that emphasised sales contributed to the scandal. She tabled internal bank analysis from last August that said “the risk/reward equation for bankers is unbalanced in favour of sales over keeping customers and the bank safe”.
Mr Waldron agreed. “I think we’ve established that there were situations where that was the case and that there were bankers who were using this system and trying to ensure that the outcome was better for them than for customers,” he said.
Ms Orr also quoted a 2016 review of one of the bank’s incentive programs following the introducer scandal that said: “There appears to be a widespread culture that permits circumventing the full verification process.”
The hearing also heard NAB’s board was made aware of the alleged fraud ring operating within the bank in western Sydney months before the bank reported it to the Australian Securities and Investments Commission.
NAB sacked about 20 staff members and took disciplinary action against many more in December 2015 after it emerged the group had drawn up thousands of loans that were underpinned by false information including fake IDs and pay slips.
NAB did not officially file a breach report with the Australian Securities and Investments Commission until February 2016 despite having a statutory obligation to report the alleged fraud much earlier. NAB did write to ASIC and call the police in December 2015.
Clancy Yeates writes on business specialising in financial services. Clancy is based in our Sydney newsroom.
Sarah is a business courts reporter based in Melbourne.
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