Major banks to face multiple court proceedings

Following reports about rolling litigation being levelled at the major banks and brokers relating to alleged breaches of the National Consumer Credit Protection Act 2009 (NCCP Act), Maurice Blackburn Lawyers has confirmed to Mortgage Business that it is acting for “many” bank customers and is preparing to commence court proceedings against major banks “in the coming months” for failing to make reasonable inquiries and verifications about their customers’ ability to repay the loan.

The move follows on from questions asked by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry over whether credit providers have adequate policies in place to ensure that they comply with their obligations under the National Credit Act.

The issue was particularly raised in relation to broker-originated home loans to customers “insofar as those policies require them to make reasonable inquiries about the consumer’s requirements and objectives in relation to the credit contract, to make reasonable inquiries about the consumer’s financial situation, and to take reasonable steps to verify the consumer’s financial situation”.

Further, Westpac recently admitted to breaches of responsible lending obligations when issuing home loans to customers, and agreed to pay a $35 million civil penalty to resolve Federal Court proceedings under the NCCP Act.

Many banks, including the majors, have recently tightened their expenses verification process and credit policies to ensure that borrowers can afford their home loans.

While home loan delinquencies have reportedly declined, repayment rates have risen and the annualised loss rate has remained stable (according to Fitch Ratings), Maurice Blackburn has suggested that the reliance on benchmarks, such as the Household Expenditure Measure, coupled with a softening property market and the “maturity of interest-only loans” could “leave thousands in financial ruin, staring at the prospect of bankruptcy”.

In a statement to Mortgage Business, Maurice Blackburn principal Josh Mennen, said: “A combination of banks’ relaxed lending standards and brokers’ involvement in loan sales has resulted in widespread debt over-commitment that threatens the stability of the broader economy.”

Mr Mennen cited a somewhat controversial survey of more than 900 home loans conducted by investment bank UBS last year, which found that up to $500-billion worth of outstanding home loans could be based on incorrect statements about incomes, assets, existing debts and/or expenses.

The law firm principal suggested that this could mean that 18 per cent of all outstanding Australian credit is based on “inaccurate information, often caused by poor advice or misrepresentations by a mortgage broker eager to generate a sale commission”.

“A staggering 30 per cent of loans surveyed had been issued based on understated living costs and around 15 per cent on understated other debts or overstated income,” he said.

“Add to the equation the fact that a huge proportion of mortgage loans issued over the past decade were ‘interest-only loans’. These loans have an initial period (usually 5 years) where only the interest on the loan is repaid. However, after the interest-only period ends and the principal is also paid down, the loan repayments can increase between 30-60 per cent,” Mr Mennen added.

“Until recently, this problem has been contained, as investors who defaulted on their mortgages were often fortunate enough to sell the investment property at a gain or at least break even, clearing the mortgage without too much pain. However, we are now seeing interest rate rises as well as property market decline,” the lawyer continued.

“These factors, in combination with the maturity of interest-only loans will further drive up distress sales in a stagnant or contracting market and may leave thousands in financial ruin, staring at the prospect of bankruptcy.”

Mr Mennen concluded: “We believe that as consumers losses are crystallised, many will have strong claims for compensation against their lender and/or mortgage broker for breaches of the National Consumer Credit Protection Act 2009 (NCCP Act) for failing to comply with responsible lending obligations including by not making reasonable inquiries and verifications about customers’ ability to repay the loan. 

“We are acting for many such customers and are preparing to commence court proceedings against major banks in the coming months.”

The court cases add to a line of proceedings targeted at the big four banks, with several class actions being taken on behalf of shareholders in the past year off the back of the hearings of the ongoing royal commission.

[Related: Major bank admits to responsible lending breaches, fined $35m]