LAST BUT NOT LEAST - THE BANK OF QUEENSLAND
It would be somewhat unfair of me to leave the Bank of Queensland out of this exercise when that Bank is one of the prime candidates for the ‘Storm Customers Busting Award’.
Rather than comment myself, I think it only fair that someone that had a franchise with that Bank speak on their behalf. Here is what that person recently told me (in emails) about the way this Bank went about its dealings with Storm and its former CEO’s involvement. I have omitted that person’s name to protect the source:
Date: Mon, 27 Aug 2012 18:56:30
“Dear Mr. Ainslie,
I have been reading your websites re the Storm fiasco and certain of your comments, including quotes from the Hansard transcript, on Messrs. Liddy and Kangatharan's comments to the Committee.
I don’t know whether you actually captured the following passage however it very clearly states that the Bank had a formalised policy developed to deal with Storm applications and take into account the earning from the investment funds which were being purchased through Storm via a BOQ home loan. This was to facilitate loan approval and essentially stop the application having to be dealt with at BOQ HO on an exception basis.
CHAIRMAN””If you discount down to four or five per cent, how does a pensioner even cover the cost of the funds? How is that possible? How does that work in numbers? That $104,000 per annum would have been their total earnings from the portfolio
Mr. Kangatharan””To clarify, in terms of that discounting back, there was a policy variation that was applied and approved. Before that approval, if any of the income from the Storm financial plan was to be included in an application it would go through an exception process. That is where the independent head office staff in risk assessment would give authorisation for the inclusion of that income. Where that was the case, it is possible that it is more than five per cent that was actually included. In this particular case, it is quite possible that on a $712,000 investment that the return component was calculated at eight or nine per cent.
In other words the Bank was clearly aware of the North Ward branch's activities and had developed policies to allow them to turn around loans quicker than normally might be the case.
In other parts of the Hansard report Mr. Liddy refers to the Bank's automated credit decision process for home lending as a branch's "delegated authority". A real delegated authority allows the branch to approve a loan without referral to a higher authority regardless of whether or not the loan is approved by the system.
Date: Fri, 31 Aug 2012 11:45:57
"Hi Frank,
We were told by the Banks that the co-owners of North Ward were the most successful OMB in terms of performance, ie new loan business. It was often the case that these guys were used as the role models for all aspiring OMBs to mimic.
How did they do it?
The Bank said they (the OMBs in North Ward) were always out of their offices visiting clients, getting off and on planes etc, etc. Note: no substantial reasons for success were ever provided just "fluff". If we did what the boys at North Ward did we would all be rich etc, etc.
Our own view, of course, is that this scruffy little branch which wasn't even on street level in Townsville (a small rural city in FNQ), could not have "honestly" produced these types of lending results without bending/shattering the Bank's policies.
For example, irrespective of what Liddy said it was a hard and fast rule of the Bank's that the branch had to interview any borrower on a face-to-face basis. We know this as the Bank knocked back deals for friends we had interstate as no face-to-face contact had occurred.
Secondly, whilst the OMB did not have a "territory" as such the Bank was not keen on local branches going interstate to get business.
These rules make good sense from a lending quality perspective.
OMBs were also not supposed to be dealing with brokers regardless of whether or not they received a commission. We were allowed to pay a couple of hundred dollars to introducers, eg real estate firms, accountants etc but were expressly forbidden to deal with brokers for housing loans. NB for certain types of commercial lending the bank still used various brokers to source new business but in mid 2004 stopped using any brokers for home lending applications. Home lending for the purpose of the discussion includes lending against the home for investment purposes. The Bank and not North Ward would have had to formally approve the document (not a Bank form) which the borrower provided to the Bank to allow North Ward to deal directly with Storm and not with the customer
So the North Ward branch breached a number of the Banks prime policies which were enforced against virtually all other OMBs.
It is inconceivable that the Bank did not know precisely what was going on at that branch (and possibly others) as, at least in theory, Liddy stated that HQ had to approve all loans. Kangatharan also stated that they had developed a process to streamline applications so they could be approved by the system.
Almost none of the OMBs we knew had the power to personally approve a loan application. It was punched into the Bank's auto approval system and if it was approved the branch had all the authority it needed. If the system declined the application then the branch could not proceed with the deal unless the defects in the application were corrected.
The system had checks built in to ensure that incomplete applications were not even processed - instead the system would highlight the missing data which had to be inserted before it would fully load up and assess the application.
If the application was declined then it had to be referred to a centralised credit unit, presumably in Brisbane, who would examine the application and revert to the branch for more information.
If the correct application details especially in relation to the borrowers assets and liabilities and income and expenses had been input to the system there is no way it could have been approved under normal circumstances.
For example, the Bank always wanted to know the reason for the loan although Liddy said he wasn't sure. (NB Elsewhere Liddy says he didn't even know what a margin loan was so pardon my scepticism). Good lending practice demands you know why a person is borrowing the money.
If its going to be used to repay other debt, buy a holiday house, investment property add an extension etc the Bank wants to know.
In the case of purchasing an investment property the bank wants to know all the details of the new property and discounts the rental flow to add a more conservative view of the additional income which will be produced to balance off the additional loan repayments which are almost always higher if the maximum tax benefits are to be enjoyed. The bank would also want a mortgage over the new property. Even if the borrower already had a home loan with BOQ and wanted to release the equity to make the purchase they would have insisted on encumbering the new property.
In other words a very conservative approach.
Contrast that with the way Storm applications were handled and all the Bank's conservative rules go out the window.
There are a number of questions which need answering.
1. If the borrower owned a home free and clear and came to the Bank and asked for a loan of 80% of the value would the bank have provided it to them if their pension and other income would not cover the repayments. Answer is no.
2. If the same borrower approached with a low doc loan application which allowed 60% of the value of the property to be loaned would the bank do that for a pensioner? Not impossible but many questions would be asked. PS Low doc customers had to have, according to the Bank's own policy, an ABN. How many pensioners do you know who had one of these.
3. If a pensioner rocked up and asked for a $300k loan against their property and told the Bank they were going to invest the funds into shares through a margin lending program what would the Bank do? Whilst it cannot provide financial advice it would have to determine if the customer would be in a position to repay the loan that it was providing. If their pension entitlements precluded their capacity to pay the loan should be declined.
Let's say they had the income to repay the BOQ debt then the application passed the first hurdle. The next question would be how high will the applicant gear the $300k loan using a margin facility. Let's say 3 times. The borrower now has a debt of $1.2m and assets of $900k in a share portfolio The property provides no income). The loan rate is always going to be higher than the deemed earning rate on the funds provided that the funds earning rates are assessed prudently. At that point the income/loan payment ratio fails the test and the loan should be declined. That's before you get into the margin call issues which I would bet were never fully understood by most borrowers.
4. How did the Bank get around this - by using the low doc process in which they had the borrower sign a statement that they had the capacity to repay the debt. This statement however in no way excuses the Bank's lending practices and its implicit requirement to deal with its customers appropriately. We often speculated how North Ward could write this volume of lending as they only had a relatively small staff - obviously if Storm completed all of the applications then all North Ward had to do was input them to the system and also fill in the blanks as required. An interview(s) with a client and preparation of an application and all the other docuemnts is a very time consuming job as the process always never goes smoothly
5 The reason the Bank entered into this arrange with Storm and BOQ did this is that it needed to lend as much money as possible and given that the margins on low doc loans were approx. 1% higher than the more competitive home product types it was profitable and very safe business as they only loaned 60% of the property value. They also knew that the types of borrowers involved were the solid, honest types who would do the right thing by the Bank even if they ate cat food for the rest of their lives.
6. In my view North Ward and the Bank were in this business completely together and both were fully aware of the risks that were being taken. At the end of the day if the share market crashed then they still had a mortgage on the borrowers property which they could always exercise and even if the property market crashed they had a 40% buffer.
7. Like most schemes founded on the connivance of the likes of BOQ and North Ward the customer was always the one to cop it sweet with all the other players getting away Scott free. I feel the Bank is the most culpable as it was in a position right from the start to deal with loan applications from North Ward/Storm in a proper manner and introduce policies to apply much more prudent rules to protect the Bank and borrower. That they willingly participated in this venture makes them the prime mover in the scheme and the most culpable."
Date: Fri, 31 Aug 2012 19:18:17
"Hi Frank,
The other point I failed to mention is that it is my understanding that the lending volumes being achieved by North Ward were perhaps as much as 8 or 10 times better than the average lending performance for the balance of OMBs located throughout the country.
That is why Liddy made them branch of the year on a couple of occasions - no other reason.
In my experience when you have a branch, or anything else, outperforming the mean by that much you either copy exactly what the staff are doing to roll it out elsewhere so everyone can benefit or if you cant do that thoroughly investigate why such performance is occurring.
If, upon investigation you determine that the success is based on shonky practice then you either kill it or embrace it and tell no one the truth.
As I say, I think that both the branch and the BOQ are up to their necks in it.
There may have been one other branch in the network that had similarly high volumes and it was very suddenly and very unexpectedly closed without hardly any notice and no fanfare."
Date: Sat, 1 Sep 2012 08:13:16
"Hi Frank,
I suspect that the rules (of the Bank) pertaining to low doc loans, under which policy , as I understand it, most of the investment loans were written, were changed as a result of the Storm fiasco.
It's important to note that the prime reason for offering low doc loans, other than the increased margin and lower risk (60% LVR) was to accommodate self employed customers who hadn't filed tax returns or who couldn't prove their incomes generally due to the nature of their employment and somewhat loose bookkeeping practices.
This is why low doc loan applicants had to have either an ACN or ABN (cant remember which).
In other words the low doc loan process was bastardised to allow pensioners, who could obviously prove their income with documentation and who certainly would not have not either an ABN or ACN, to borrow money without making a full application.
My gut feeling is that the Bank will try to use this line to say that they didn't know either the applicant's current or future income or expenses. That of course falls in a heap with Kangatharan's admission they developed a special policy to streamline these particular loan applications plus the other policy breaches I outlined in a different email.
In my view the North Ward office was in a position of knowledge when it came to understanding why and for what precise purpose the money they were lending was to be employed. Back to the low doc scenario, had they input the pensioner's income (provable) into the system the application would likely have been rejected as the income would have been too low to support repayments and other expenses. The bank's low approval system like every other banks' is a complex algorithm which determines the customers ability to make the payments and still have a life. Banks do this to ensure they are protected against risk and are seen to be responsible lenders.
Remember the low doc loan process bypasses all these safeguards.
To answer your question the low doc loan policy was "bent" by North Ward branch with the complete cooperation of the Bank in order to approve loans against real property which would not have been able to have been approved in most cases based on the pensioner's declared income. NB presumably not all applicants were pensioners. It would be interesting to see if the bank used the normal application process (ie not the low doc policy) for working applicants whose income would be sufficient to service the loan - if you could find such applicants it would go a long way towards proving the bank/North Ward was bending their own policies to ensure the loans were approved one way or another."