Professor Janek Ratnatunga, the CEO of the Institute of Certified Management Accountants (ICMA), looked into the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry’s interim report released on Friday (28 September), but added that he believed mortgage interest calculations should also have been looked into.
According to Professor Ratnatunga, the way banks calculate interest on mortgages could be “the biggest fraudulent or dishonest act or practice”.
He said: “The biggest rort that appears to have gone undetected is the way banks use basic finance annuity equations to calculate monthly mortgage principal and interest repayments and the interest on deposits into offset accounts.
“The finance equations used to calculate the mortgage interest by banks are either erroneous, or are skewed to provide answers always in the bank’s favour at the expense of their customers.”
Professor Ratnatunga said that he had collected examples of where a mortgagee’s monthly interest and principal repayment stated in their bank mortgage statement was different to that obtained by using that bank’s own loan calculator.
According to the ICMA CEO, in one case, the difference was $14.49 per month over 30 years and amounted to a present value of $2,493.45 (in the bank’s favour).
He highlighted another case in which the mortgagee elected to repay the interest and principal fortnightly and the bank simply halved the monthly rate.
Professor Ratnatunga said that when he told the bank that this was an error (as the principal was being repaid at a faster rate), the bank said that it had changed the method of calculation in February of this year.
He suggested that this change could have been due to the pressure being applied to banks by the royal commission.
“Even if the banks use the correct equations, how they apply these equations when interest rates change is always in the bank’s favour,” the professor said.
“When interest rates go up, the change in mortgage interest payable is applied immediately; but when interest rates go down, these are only applied from the beginning of the next monthly cycle date of the loan.”
He went on to say that banks “hide” these “rorts” with “incomprehensible mortgage loan statements that lack any semblance of transparency” and sometimes include unexplained “interest corrections”.
While Professor Ratnatunga noted that the interim report did allude to bank statements lacking transparency in charging overdraft and dishonour fees, he urged the royal commission to undertake a forensic audit of the mortgage interest calculations of a sample of mortgage loans, covering all banks.
“The ideal time to do such an audit is when the bank is asked to provide a final discharge amount on the termination of a loan,” the professor said.
“If given access to bank records, a simple calculation by a finance expert will indicate if the discharge amount is correct, or if it’s substantially in the bank’s favour,” Professor Ratnatunga concluded.
[Related: RC report slams ASIC response to misconduct]