MICHAEL WEST April 14, 2012
Kate Thompson was one of Australia's top 10 mortgage brokers. She wrote more than $100 million in loans in a single year and, by her own account, was more likely to close a deal with a "hug and a kiss" than a handshake.
Now she faces multiple charges of theft and fraud in a Perth court and her broking operation, Mortgage Miracles, has closed.
Thompson was one of the more vivacious vendors of low-doc loans. The actual loans for brokers such as Thompson came from the likes of Perpetual, Westpac, Suncorp, Macquarie, RHG, ANZ and the Commonwealth Bank.
Things may soon get uncomfortable for some in this low-doc star chamber, should recriminations arise between the banks and their brokers. Defiant and desperate to spread the blame, Thompson promised the State Administrative Tribunal in Western Australia last month she would deliver 15 witnesses to show how bankers beat a path to her office and wrote loans for her customers.
''The banks gave Australia these products so anyone with some equity and a pulse could qualify for a loan,'' she said.
''As a result, tragically the banks are now the owners of that equity and as far as I am concerned the banks stole it from them.''
It won't be as simple as that. When it comes to low-doc loans, there are six degrees of separation between the banks and their borrowers.
Julia Eastland is a 71-year-old pensioner from Perth and one of Kate Thompson's clients.
Eastland took out a "low no-doc loan" on the advice of Thompson for $248,500. She used her family home as collateral. As she had very little income, she was unable to afford the repayments.
She defaulted. A consumer rights advocate, Denise Brailey, helped Eastland petition the Financial Ombudsman Service which, despite a governance ring to its name, is itself funded by the banks. FOS found the loan application had been doctored by the broker. It also found "maladministration" on behalf of the lender, Macquarie.
However, it saw no evidence that Macquarie was the agent of the mortgage broker, Thompson's Mortgage Miracles.
So FOS recommended - despite the doctored loan documents and the fact that Eastland should never have been lent the money in the first place - that liability be apportioned 75-25.
In other words, the bank would not change the locks on the Eastland family home but its septuagenarian borrower would still owe one quarter of the loan.
For their part, the banks are distanced from the low-doc borrowers by a fancy structure that entails six degrees of separation.
Although the loan contract itself is between the two parties, the borrower and the lender, and article 25 of the Code of Banking Practice says the banker ought to establish if the borrower can afford the loan, the banks contend that the brokers are not their agents.
This agency issue lies at the heart of the handful of low-doc disputes which have made it to court. As low-doc loans squarely targeted those at the lower rungs of the credit food chain, few can afford to sue. And how do you sue a "structure" anyway? A letter from Perpetual about the Julia Eastland situation describes "The Structure":
The banks and other lenders are the "investors". The investors lend money to the "trust", of which Perpetual is the trustee. The "program manager" and the "servicer" of the trust is Macquarie Securitisation Ltd.
Using this money from the banks, the trust then buys a pool of loans from the "mortgage managers" (parties such as Mortgage Ezy, Macquarie Mortgages and AFG).
These "mortgage managers" then organise finance for the "loan introducers" such as Thompson's Mortgage Miracles.
There you have it, six degrees of separation. There is a corpse but no murderer, just a mute, multi-headed structure-beast lurking near the crime scene.
The Perpetual account of how things work is as structured as The Structure itself.
In reality, the big brokers such as Thompson are smothered with love by the lenders because they bring business in the door.
The risk to the banks is probably contained to PR and legal costs. Save FOS, which is an industry body, no regulators are involved.
The low-doc clients are often elderly and financially unsophisticated people, so the "media noise" from their cases is unlikely to get too loud. Though, according to Graeme Hancock, a lawyer who has represented some victims, the loc-doc loan debacle is systematic and widespread.
"There are 3500 people who have been done over - and they're just the ones we know about," Hancock says. That includes two 80-year old pensioners who were encouraged to take out a loan from Westpac.
"Why are there six degrees of separation between the lender and the crook who fudged the details (on the loan documents)?" he asks.
There are a number of variations on the low-doc "scam" as Hancock describes it.
One, the client is enticed by a property deal and sold a loan on the proviso that the property will be flipped (sold again) before the loan is settled.
Two, the loan is made for whatever worthy purpose but the client is told not to worry about repayments as the repayments can be made from the principal of the loan. Sound familiar?
Who wrote the script? The low-doc loans appeared almost 10 years ago. Originally designed to help small business, they were soon piggy-backed into investment loans and, by about 2005, they took off as a popular way of financing investment in Queensland property.