- Drowning in debt: Peter and Anne Harwood’s Commonwealth Bank nightmare
- By Greg Bearup and Anthony Klan
- Contributed by: Simon_P ( 1 article in 2018 )
Unremitting stress: Anne and Peter Harwood.
Like a couple of students showing off their first share house, Peter and Anne Harwood take us on a tour, pointing out the various pieces of second-hand furniture they’ve scrounged on Gumtree. “These couches — 50 bucks!” says Peter proudly. “The things were so bloody heavy; the bloke who sold them hadn’t realised they were sofa beds.” A couple of spare beds thrown in free. Anne smiles at his enthusiasm, his endless optimism. It’s kept them going, possibly the only thing that has because the Harwoods are not young and are not just starting out. Hunting for bargain furniture is not how Anne envisaged retirement.
Peter is 80 and Anne 73, and they’ve spent the past few years living in a 27-year-old caravan, moving between free bush campsites around Australia, fugitives from a grim reality. They’d still be on the road if not for Anne’s cataracts, which are in need of repair. And Peter, armed with lever arch folders and boxes of documents, found it difficult to plan his battle strategies on the small caravan table. He’s like a man with a shanghai facing an armoured tank. And so they’ve come in from the long paddock to rent a cheap but pleasant house in Penshurst in the Southern Grampians, one of those once-grand western Victorian towns with wide streets, more houses than families and more shops than customers.
Back in 2006, when they sold their business — an outback general store at Lake King, 460km east of Perth — they were in a reasonably good financial position. They bought a house in Perth and owned two investment properties, a unit in Queensland and a house in rural Western Australia. They also owned a small bush block in the cool-climate winegrowing region of southwest WA, where they planned to build a house. All up they had assets and cash of $1.395 million and debts of $670,682 and, with no superannuation, Peter was able to draw a small pension. “And then, not long after that, the shit hit the fan with the Commonwealth Bank,” says Peter.
When he leaves the room, Anne pulls a tissue from her sleeve and dabs her rheumy eyes. “We trusted the banks,” she says. “We grew up in an era when you trusted the banks.” But as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is revealing, that was their first mistake.
They’ve been following the proceedings before former High Court judge Kenneth Hayne with a sweet dose of schadenfreude — finally, someone is listening. The Harwoods always suspected something was rotten with their loan but it wasn’t until years later, after fighting to gain access to their own loan documents, they would discover their application forms contained properties they never owned, income they never had and signatures they say weren’t theirs.
“He’s in his 80s, and she is in poor health,” saysDenise Brailey, who runs the Banking and Finance Consumers’ Support Association. Brailey has been likened to Erin Brockovich for her fierce advocacy for those who’ve fallen foul of the banks. “They both worked hard all their lives and saved and they end up with nothing. The stress they’ve endured is unbelievable.”
The issue, Brailey says, is this: how did a couple who had $724,000 in equity and savings when they retired end up, six years later, living in an old caravan with most of their property sold off and the Commonwealth Bank determined to take their remaining assets? The Harwoods still owe $220,000 to the bank, a debt that’s rising by more than $1000 a month on a penalty interest rate of 17.94 per cent.
“If they took this to court I’ve no doubt they’d win and the bank would have to take them back to their original financial position,” says Brailey, who has acted as an adviser in a number of successful cases against the banks. “But most people who’ve gone broke don’t have $300,000 to take on the banks in court.” And so now the Harwoods are fighting for what they can get.
The couple admit they are not sophisticated investors. A few years before they retired they attended a seminar in Perth run by Brisbane-based Hudson Financial Planning, “the first completely online and telephone financial planning company in Australia”. In the years after the seminar they would receive emails from Hudson asking if they wanted to restructure or invest in real estate in Queensland. Every quarter, they say, they’d get a phone call saying “let’s just run through things” and “they’d send us details of new home unit developments in Queensland and things like that”.
In October 2007, after selling their business, the Harwoods contacted Hudson, which put them onto one of its mortgage brokers. “I said, ‘Look, we are retired’,” says Peter. “You know we’ve got shares and a certain amount of cash. We’ve got lots of equity. Any suggestions how we might be able to capitalise on our equity?” He says they weren’t desperate but were looking for sound advice to secure their financial position in retirement.
The broker advised them, they say, to refinance their three dwellings — the two houses in WA and the unit in Queensland — and borrow 80 per cent of their value, which would free up the capital to invest in more property. He said the bank would give them a line of credit of $160,000 as a “buffer zone”. “He said we could sell off any one of the properties at any time if we ever got into trouble,” says Peter.
The Harwoods say the broker told them the banks were offering “low-doc” (low documentation) loans and all they needed was an Australian Business Number for three days. They thought their ABN had been cancelled after they sold their business, but in fact it was only dormant. The broker organised the loans and they bought a house off the plan in Queensland for $560,000, which they hoped to rent out when it was built. With no super, they were convinced that this was the path to a secure retirement, funded primarily through the rental return on the properties and real estate appreciation.
The Harwoods didn’t know it at the time but these subprime loans would become infamous as the spark that in 2007 lit the inferno of the global financial crisis. As the world picked through the ashes of the biggest crash since the Great Depression, the mechanics of subprime loans came under intense scrutiny in the US — why were people who could never afford it given loans to buy property? Because Australia sailed through the 2008 GFC relatively unscathed, local bank executives who’d embraced subprime loans escaped admonishment — until now. One by one, nervous bankers are being hauled before the banking royal commission as Hayne flicks a match to a blowtorch and hands it to a gleeful silk.
In the Harwoods’ case it was always going to end in disaster. They were in trouble right from the start. They got the money in January 2008, increasing their debt by $400,000 to $1.07 million. In October 2008 they got their first arrears notice. They did all they could to make the repayments — they burned through all their cash, sold all their shares, cashed in Anne’s insurance policies, sold her car and all their antique furniture and artworks. They then started making the payments from the line of credit, putting them further in debt. None of it could paper over the fact that there was a $35,000-a-year shortfall in their income required to meet their payments. They put their bush block on the market, held an auction and nobody turned up to bid.
“We submitted a number of hardship requests via letters to the CBA [Commonwealth Bank] and FOS [Financial Ombudsman Service] as we were well aware of our deep financial predicament,” Peter says. The bank adjusted the “repayment structures” but said it would require serious action by the Harwoods: they were told they would have to “sell off one or two properties”. They were forced to sell their rental properties, their only income apart from Peter’s part pension.
The CBA was unscathed but the Harwoods were doomed. So far they’ve paid the bank $1.022 million from the sale of properties, plus hundreds of thousands of dollars in interest. In just six years they went from secure to desperate.
The intent of subprime loans — low-doc loans and their feral little brother, the no-doc loan — was to circumvent the decades-old practice of requiring borrowers to prove they had the income to repay their loans. The effect was to sidestep the banks’ legal and ethical requirements to lend responsibly. For tax dodgers, getting a loan is often difficult: they may have plenty of cash but their books and tax certificates tell a different story. Banks knew they were missing out on these buckets of cash, so they changed the rules. When they began selling subprime loans in the late 1990s they were an instant hit with tradesmen and other small-business owners averse to sharing their actual income details with the tax office. Hence, they are sometimes called “liar loans”. Sometimes the lies were from the borrowers themselves, but as the royal commission is discovering, sometimes the lies have come from mortgage brokers and bank staff, eager for commission. The banks, hungry for business, haven’t bothered checking to see if the income claims were true.
In just four years, from 2002 until 2006, there was an explosion in these loans from $17.5 billion to $37.9 billion in Australia. They rose to more than 16 per cent of all housing loans written by 2006 and were now not just being sold to cashed-up plumbers and hairdressers but to people who couldn’t justify a regular loan because they couldn’t afford it.
Veteran banking analyst Brian Johnson, of Credit Lyonnais Securities Asia, says the system was geared towards mortgage brokers signing the riskiest loans. “If I’m a mortgage broker I want to originate really, really big loans that are interest only,” he says. “Because I get a trailing commission, I don’t want you to actually repay the loan because that would lower the trailing commission.” When clients were told they could borrow a million dollars they believed the bank, Johnson says. But they weren’t told it was “only if you make drastic changes to your lifestyle and live in poverty and if you fail we’ll cheerily take everything you own”.
The banks were happy to take the business and then claim it was the responsibility of brokers to vet the customers. When The Weekend Australian Magazine contacted the Commonwealth Bank regarding the Harwoods’ case, its spokesman initially pushed this line. “The broker is an agent for the customer to provide them with the best loan option,” he said. “People go to a mortgage broker to get them the best loan for them.” He added it was not the bank’s fault that the Harwoods were signed up to a loan they could never service. “Why did they take the money then?” he asked.
It raises the question: if the banks have a legal and ethical responsibility to lend responsibly, how can they absolve themselves of all responsibility in the verification process? Whatever the banks claim, Hayne appears to be taking a different view about who the mortgage brokers work for, having uncovered example after example of brokers acting to the benefit of the banks, or in self-interest; the customer being the chump in this arrangement.
In one case study before the royal commission, similar to the Harwoods’, a 72-year-old pensioner was loaned $50,000 by the ANZ bank through a mortgage broker. There was no possible way he could pay it back other than to sell his house. Hayne will consider numerous charges of misconduct against the bank in this case for failing to engage with the customer “efficiently, honestly and fairly”. Despite the customer using a broker, it was the responsibility of the bank to ensure their lending was responsible, it was submitted to Hayne. “ANZ are going to have to tell me their views,” the commissioner said. “But I must say the evidence is a little striking.”
In 2012, The Australian uncovered a trove of emails between the banks and mortgage brokers that showed the banks were spruiking “ABN for one day” arrangements to provide the fig leaf that borrowers were self-employed. Macquarie Bank was emailing brokers offering loans requiring a “one-day ABN”. GE Money told brokers: “Our one-day ABN product keeps getting better.” Suncorp claimed: “We can look at applications where the ABN has been in place for one day!” The emails revealed the banks didn’t care if the customer was a legitimate small business owner or not.
After the discovery of these emails, Denise Brailey advised hundreds of her members, including the Harwoods, to apply to the banks to get copies of their loan application documents. The banks were resistant, and in some cases only supplied them heavily redacted. But many members were able to get the uncensored documents by filing Freedom of Information requests with the Financial Ombudsman Service.
The CBA initially refused to give the Harwoods their loan documents but in 2013 they applied to the FOS and received two large archive boxes full of documents. They were stunned with what they found. On their loan forms were listed two properties collectively worth $600,000 that they did not own. The documents claimed they had business equity of $150,000 — yet they’d sold the business months before applying for the loan. It also claimed they owned a boat worth $5000. They’d never owned a boat. But it was the Harwoods’ income declared on the four loan forms that really shocked them. Peter says the application forms included vastly inflated incomes for the couple, and the inaccuracies were not even consistent. In one case they earned $154,000 a year, in another $308,000 a year; in another the couple apparently earned $342,840 a year. Peter was on a part pension. They also found the bank had twice rejected the loan, with a note saying “fails servicing test” and that it required “validation of supporting statements”. The Harwoods say no one from the bank contacted them to validate anything when the loan was approved.
The Weekend Australian Magazine has seen a document Peter Harwood says he sent by express post to the mortgage broker on October 12, 2007, prior to the loan application. It is their actual financial position and contains none of the false information they later found on their loan application documents. When he contacted Hudson in 2013, seeking his documents, he was initially told they were in storage. He was then told they had all been destroyed. The broker later threatened to sue the couple for defamation.
What Denise Brailey and her members uncovered was a systematic rorting by brokers on the loan forms. They found hundreds of examples of false incomes, false assets and forged signatures. The banks had issued the loans on a false pretext, not bothering to check with the customer, and as a result hundreds of people lost their main asset, their family home, having been signed up to a loan they could never afford.
“We were dumbfounded by the vast number of false assets, false income and other false entries on our loan applications which we discovered involved some 12 or more pages each, rather than the three pages we had seen originally,” Peter Harwood says. “There were over 30 false entries in one loan application form alone.”
Brailey says when cases similar to the Harwoods’ have gone to court, the courts have generally ruled in their favour. The courts have repeatedly determined, she says, that the mortgage broker is the agent of the bank, not of the borrower.
In 2012, the NSW Supreme Court found in favour of John O’Donnell and his wife Jill, who faced ruin after they were encouraged by a mortgage broker to take out a $500,000 loan against their family home to invest in a property development. At the time they were granted the loan by Brisbane-based lender Firstmac, John had been unemployed for 18 months and Jill made just $23,000 a year. After losing their money when the developer went broke, the couple applied for their loan documents and found the mortgage broker, Streetwise, had falsified their income and financial position to ensure the loan was approved. Firstmac had never contacted the O’Donnells to check that the income stated on their application was correct. The court ordered that 75 per cent of the $500,000 loan be extinguished.
There have been numerous other successful cases, says Brailey, and in every case the banks spent millions in a bid to maintain the facade that mortgage brokers were agents for the customers. The O’Donnells’ case made it to court only because it was funded by consumer advocate Neil Jenman, who says it cost $1 million to fight.
When told the Harwoods believed their loan documents had been doctored, a Commonwealth Bank spokeswoman is dismissive and says, “Well, why didn’t they take this to the police?” Peter says he wanted to do this but was advised by Brailey and others who’d reported forged loan documents before that police viewed the matter as a civil dispute. The Harwoods approached the ACT Legal Aid Commission but were told it didn’t have the funds to take on the banks. They also approached a number of private lawyers, but the couple don’t have the funds to launch a court action.
“The banks are fighting so hard [in the courts] because — now that people know to get their hands on the loan application forms — this is their last defence: trying to pretend the broker is the agent of the borrower, rather than the agent of the bank,” Brailey says. “In these cases they’re not arguing the borrower made up the figures on the forms; instead they are trying to claim the brokers are responsible for the borrower’s losses, not them, but time and again the courts are proving otherwise.”
The Weekend Australian Magazine put a series of questions to Hudson Financial Planning, and the broker, but they declined to answer. In a statement, a Hudson spokesman said multiple third-party reviews had been conducted into the Harwood matter — including by the Financial Ombudsman Service and the Credit and Investments Ombudsman — which had dismissed the complaints. He said Hudson had fully co-operated with the investigations and “no finding of wrongdoing has ever been made against us”. Privacy obligations prevented Hudson from discussing the Harwoods’ complaint, he said.
After beating their heads against a wall with the Commonwealth Bank, the Harwoods did complain to the Financial Ombudsman Service, which concluded in 2014 that the bank had acted prudently. “It was entitled to rely on the income information provided” by the broker, it said. The FOS said the broker was an agent for the Harwoods, not the bank, and it ruled against the Harwoods. It relied on the same false figures that had been supplied to the bank to conclude they had the money to service the loans. When the lead ombudsman, Philip Field, appeared before the royal commission, he said: “We try very hard to ensure that the outcome the customer gets is fair in all the circumstances.” There were howls of laughter from the public gallery. Denise Brailey says the FOS, which is funded by the banks, is a “sad cut-and-paste consumer complaint service that is harmful to consumers”. In her opinion, "it serves no credible purpose other than as an advantage to the banks".
For more than a decade the Harwoods have been trapped in this Orwellian nightmare, being bounced between customer experience officers, high priority managers and resolution specialists as they’ve watched their assets erode. “We used to enjoy going to restaurants and the theatre but we haven’t done that for years,” says Anne. “We limit ourselves to one cup of coffee each a month at a cafe.” Her daughter lives in Scotland and she says her great regret is that she can’t travel to see her and her 11-year-old granddaughter.
When they were forced to sell their home they fled Western Australia in their caravan to get away from it all. Besides, they had nowhere else to live. “There’s a great sense of shame,” Anne says. “Our whole world has been turned upside down. You leave your family and you leave your friends. You don’t want to talk about it with anyone, because you feel like such a fool.” They admit they were foolish to ever take out the loan. They paid the price. The bank got their assets.
When this magazine first contacted the Commonwealth Bank about the Harwoods it seemed to be taking a hard line stance. And then, a week later, we received a phone call from a spokeswoman saying the bank now wanted “to reach out to the Harwoods” to “look at it with the lens that it needs to be looked at now … ultimately it is about getting the right outcome for our customers”.
It then issued a statement saying that it was sorry for the “experience” the Harwoods had in relation to their investments. “While this matter has been examined by independent third parties a number of times, we are currently reviewing Peter and Anne’s loans, accounts, and all other information we have in relation to their financial situation, to understand if there is anything we could have done differently in their circumstances … Where mistakes have been made, we will put these right.”
In the wake of the royal commission, Australia’s banks are finally being forced to “reach out” to their valued customers.
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