From the CEC:
There is a case to be made that Australia’s bank regulator has colluded with the banks to hide massive fraud in mortgage lending. The Australian Prudential Regulation Authority’s (APRA) collusion includes suppressing its own research into lowered lending standards, and misleading Parliament about its knowledge of illegal misconduct by banks in mortgage lending.
In a 1 March 2018 hearing of the Senate Economics Committee, Greens Senator Lee Rhiannon questioned APRA chairman Wayne Byres on his knowledge of mortgage control fraud. The hearing was 11 days before the start of the first round of hearings of the Financial Services Royal Commission, which the issue of mortgage control fraud would dominate. Perhaps unaware of how much the royal commission knew, Byres responded to Rhiannon’s questions with APRA’s trademark obfuscation and deflection. Documents subsequently released by the royal commission, however, show that Byres lied.
Rhiannon asked Byres, “In relation to your investigation into mortgage fraud, which APRA has not made public, has APRA found any evidence of illegal misconduct in the mortgage market by the major lenders?”
Byres ignored the point of the question and instead denied that APRA was looking into mortgage fraud. “I wouldn’t say what we’ve done is specifically a review of mortgage fraud”, he said, adding that they have looked “generally” at lending practices and controls. He then claimed that APRA had not found evidence of illegal misconduct.
With this reply, Byres misled the Senate. APRA was investigating mortgage fraud. The proof is revealed in documents made public by the royal commission on 23 March, which included reports to the major banks by accounting giant PricewaterhouseCoopers, of targeted reviews PwC had conducted in 2017 into the banks’ mortgage lending controls. As PwC’s reports made clear, APRA had ordered the reviews.
In PwC’s May 2017 report to Westpac entitled “APRA Targeted Review of data used in residential mortgage serviceability assessments”, PwC states explicitly in the Executive Summary that APRA had ordered the reviews due to concerns about mortgage control fraud. “On 12 October 2016, APRA issued a letter to the Bank and 4 other large banks requesting that they undertake a Review into the risks of potential misrepresentation of mortgage borrower financial information used in loan serviceability assessments”, PwC noted. “In its letter, APRA referenced assertions made by commentators that ‘fraud and manipulation of ADI residential mortgage origination practices are relatively commonplace’.” (Emphasis in original.)
This proves that APRA clearly ordered the banks to conduct targeted reviews of mortgage fraud. Yet the royal commission is unlikely to have had this evidence, had it been up to APRA. Later in her questioning, Lee Rhiannon asked Byres if APRA should be proactive in providing information to the royal commission, but Byres replied, “We’ll wait and see what the royal commission asks.” His extraordinary excuse was he didn’t want to “swamp them with things that are not relevant to them”. Byres’ idea of what’s “not relevant” appears to have included PwC’s reports.
A few days before Byres’ testimony, Lindsay David of LF Economics had tipped off the royal commission about the targeted reviews. This was around two weeks before the royal commission’s first round of hearings, which were on mortgage lending. LF Economics specialises in forensic analysis of misconduct within the mortgage market, and has probed into the details of many of the numerous cases of mortgage fraud that the Banking and Finance Consumer Support Association’s (BFCSA) Denise Brailey, the leading expert on mortgage fraud in Australia, has exposed through her tireless advocacy for bank victims. (CEC Research Director Robert Barwick interviewed Denise Brailey for the 22 and 28 March 2018 episodes of the CEC Report, available on YouTube channel CEC Australia.)
According to David, LF Economics first became aware of the targeted reviews in mid-2017, but had been informed that they were “so unfavourable they would never see the light of day”, he recalled. At the time he was consulted by the royal commission staff, they were unaware of the existence of the targeted reviews—indicating that APRA had not revealed them. It was David’s tip-off that led the royal commission to request copies from the banks, and make them public on its website.
So why would Byres go out of his way to deflect the attention of the Senate committee away from the fact that APRA was looking into mortgage fraud? And why would APRA not share this with the royal commission? It goes to the collusive relationship APRA has with the big banks, which former ANZ director John Dahlsen denounced in the 21 August Australian Financial Review as “incestuous”. APRA is notoriously secretive, with the power to suppress information through strict secrecy restrictions. It has a track record of using its secrecy to cover up risks and fraud in the banking system. Due to its excessive secrecy, APRA is effectively unaccountable, which breeds the arrogance on display in committee hearings.
APRA is complicit in the banks’ reckless lending, which has created a dangerous housing and debt bubble that threatens the Australian economy. It allowed the banks to lower their lending standards in the early 2000s, to be able to massively expand their lending to homebuyers and investors who, like the US “sub-prime” borrowers whose defaults sparked the 2008 global financial crisis, couldn’t afford normal loans. In March 2007, APRA suppressed an explosive internal report which warned that the lowering of lending standards had led to the banks lending 3.5 times more credit for mortgages than would have been the case under the previous, higher standards. And APRA repeatedly lowered the so-called “risk-weighting” of mortgage loans to make them far more profitable than any other lending, and to fake the appearance that banks were raising their capital to the “unquestionably strong” levels of 14.5 per cent, whereas real bank capital stayed at less than six per cent.
In short, APRA incentivised the excessive mortgage lending that motivated the banks to resort to fraud. It’s a fair bet that Byres hoped to keep APRA’s awareness of the problem under wraps, to protect the illusion that it is a “sound” prudential regulator. He wasn’t banking on the royal commission process, however, which has destroyed this illusion and opened the possibility of fundamental reform of the banks and regulators.
Join the fight to break up the banks and reform APRA!
The mortgage fraud by the banks that APRA has covered up massively expanded Australia’s housing and debt bubble. Now the borrowers who couldn’t afford their mortgage in the first place are threatened by rising interest rates, which will trigger increasing defaults and ultimately crash the bubble—and the banks. The CEC’s Banking System Reform (Separation of Banks) Bill 2018, which Bob Katter MP introduced in Parliament on 25 June, will break up the banks, by separating the commercial banks with deposits from all other financial activities, and bring APRA under strict Parliamentary control. This will enable the government to implement measures that clean up retail banks used by the public in a way that stops them from crashing, and stops APRA from using its “bail-in” powers to steal our savings to prop them up.
Contact your MP today to demand they debate Bob Katter’s bill! The government wants to shelve it, so we must force them to debate it, which will force all MPs to either support it, or justify why they won’t—and in light of the revelations from the royal commission, which have led to many calls to break up the banks, that will be very hard.