Fraud rife in banking system, with lending practices
threatening financial system stability, economists say
Posted Thu 21 Apr 2016, 11:46pm
Fraud is rife in the banking system as banks systematically fudge the
numbers on loan applications to make borrowers look more
creditworthy than they really are, according to an explosive
submission to a Senate inquiry on white collar crime.
The economists Lindsay David and Philip Soos argue that the practice,
together with a dramatic lowering of lending standards, is responsible for a
massive housing bubble and threatens the stability of the entire financial
system.
"The banks have trashed their lending standards over a prolonged period of
time with significant evidence of banks massaging people's incomes in their
loan application forms to make them look a lot more creditworthy than what
they really are, which is essentially fraud," Lindsay David of LF Economics
told the ABC's Lateline program.
"The banks would do this for various reasons. One is the highly competitive environment between the banks. Second of all
is profitability.
"The safer your mortgage book looks, the lower it costs you to do business — simple as that. If you show that your
borrowers are very creditworthy then you are going to get cheaper funding costs, and that's a win-win for the bank — until
the whole system breaks down, obviously."
But at some stage, they argue, an economic shock will expose the decline in lending standards and cause a loss of
confidence in international markets, undermining Australian banks' access to the cheap offshore funds they rely on to
maintain their lending.
"I don't think that Australians realise the risks the banks have taken in order to get house prices as high as they are," Mr
David said.
The submission to a Senate inquiry on penalties for white collar crime will be publicly released next week.
Their analysis draws on the work of criminologist and consumer activist Denise Brailey, who has received and examined
more than 2,000 loan applications and related documents from aggrieved bank customers.
"We see incomes exaggerated, that's extremely common. We see signatures forged," said Ms Brailey, who runs the
Banking and Finance Consumers Support Association.
"In all cases," she said, "[the loans are] unaffordable, unsustainable and unverified."
Jeff Morris, the whistleblower who exposed the Commonwealth Bank financial planning scandal that led to calls for a
Royal Commission into financial services, also believes that the practice of banks artificially boosting borrowers' income
and assets in order to make loans is common.
"You've got [mortgage] brokers and lenders, who are remunerated on the number of loans they write, simply massaging
the figures to put it through the computer system, and then it spits out an approval," he said.
Lenders under pressure to meet sales targets: whistleblower
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