Banking Royal Commission: We rely on car dealers to verify our loans, says Westpac

Australian Financial Review Mar 21 2018 5:20 PM

James Frost

Australia's largest provider of auto loans accepts customer information provided by car dealerships as gospel and does not independently verify the expenses – and in some cases income – of loan applicants.

The Hayne royal commission heard from  Nalini Thiruvangadam on Wednesday about her experiences with car finance provided by Westpac. The part-time carer and recipient of Centrelink benefits was approved for a loan after submitting an application stating she had zero expenses.

Westpac is the single largest provider of car dealership or white label financing. The bank approved hundreds of thousands of car loans in 2017 worth billions of dollars. Around 90 per cent of new cars sold in Australia are financed with 39 per cent of these loans originated through car dealerships.

Westpac's general manager of specialist finance Phillip Godkin was asked to explain how Ms Thiruvangadam was able to obtain the loan – which she would default on within a matter of weeks – despite an almost total absence of supporting income and expense documents.

"So no Centrelink verification, old pay slips, part-time, no expenses and some unresolved problems with the phone company, is that right?" Commissioner Ken Hayne asked.

"Is your evidence that it's still the case that there is dependence by Westpac on the accuracy of the car yard business manager, what it tells the company?" Commissioner Hayne asked.

"So if I may, the question was quite specifically in relation to expenses but yes, the answer is yes," Mr Godkin replied.

He  explained that at the time the bank would substitute the Henderson Poverty Index for expenditure in examples where none were submitted. The bank has since changed the default setting to incorporate the household expenditure measure or HEM.

Inherently conflicted

An internal document produced in October 2016 found the loan application form used by third parties such as car dealers did not articulate whether the loan repayment terms were aligned with the customers' circumstances or having sufficient regard to a customer's monthly expenses.

Westpac was also forced to answer why it persisted with the model of offering car dealers flex commissions – the practice of charging a customer a premium over the base interest rate set by the bank – when it knew the structure was inherently conflicted and produced poor outcomes for customers.

In addition to flex commissions the dealers earned volume-based incentives, a loan origination fee and a flat monthly marketing fee. Some dealers will earn more commissions on top. An internal St George document dated August 2015 examined the structure of payments and found them inherently conflicted.

"There are weaknesses in the design of remuneration structures and monitoring of sales practices for dealerships who are originating retail auto finance loans ... current practices significantly increase the risk of unfair consumer outcomes where dealer behaviour may be influenced by commission plan design and the ability of a customer to negotiate," the note read.

Other internal documents tended by the royal commission showed the bank was prepared to accept car financing loans with loan to valuation ratios of up to 180 per cent which included taking on the negative equity of an existing loan and potentially add-on insurance as well.

ABS figures show that car finance payments are a significant component of household budgets with $2.8 billion of finance commitments to December 2017.