Watchdog asleep on Australia's sub-prime scandal Illustration: Michael Mucci A leading consumer activist claims the corporate regulator has not only failed to investigate hundreds of cases of loan fraud put before it but, as a consequence, has covered up a systemic banking failure. As the deadline for submissions for the Senate Inquiry into the Performance of the Australian Securities & Investments Commission (ASIC) closed this week, veteran consumer rights activist Denise Brailey filed a brutal assessment of ASIC's failure to investigate the cases of loan fraud. Already under fire for its failure to prosecute the Leighton Holdings bribery scandal and the Commonwealth Bank financial planners and Securency debacles, the submission by Denise Brailey turns up the pressure on the embattled regulator. A date for Senate hearings is yet to be set. BusinessDay reviewed the documents of dozens of victims - which are lodged on Brailey's Banking and Finance Consumers Support Association (BFCSA) website - and found the evidence supported Brailey's claims of systemic fraud. ASIC and the banks have long argued that any irregularities that Denise Brailey has identified were the fault of rogue mortgage brokers. Further, they have claimed the problem is contained to "low-doc" loans (usually for small business). However, Brailey's submission found that 36 per cent of all "toxic" loans had been arranged directly by bank officers, with no broker involved. And 18 per cent of all toxic loans were "full doc" loans, arranged by banks and not brokers. The overall numbers in Brailey's survey are large and involve complaints against most banks and mortgage providers. The survey is taken from almost 800 loans, involving almost 1,200 people (many are couples) who have failed to get a response through official channels and came to her for help. The bulk of the claims pertain to the "Big Four" - ANZ, Westpac, CBA and National Australia banks - who dominate the mortgage market. "In 2005, Major Banks took control of 85 per cent of the Low Doc market, yet ASIC neither warned the public, nor took action via the courts against any lender," says the submission. For a staggering fourteen years, ASIC turned its regulatory back on these victims ... scandals that are only now bubbling to the surface. A number of victims canvassed by BusinessDay confirmed Denise Brailey's claim that their Loan Application Forms (LAFs) had been tampered with, usually to inflate the customer's assets and income in order to increase their borrowing capacity. BusinessDay will publish further victim case studies over the following days. In her submission, Brailey repeated the claim made earlier this year that "there was not one clean LAF" among her BFSCA members. Many of these members had been advised by Brailey to complain to the Financial Ombudsman Service (FOS). FOS is funded by the banks and other financial institutions on a pro rata basis according to the complaints made against them. The Brailey submission also details the efforts by her and her members to get ASIC to investigate the fraudulent LAFs. ASIC responded in June this year that Brailey had failed to provide them with sufficient evidence of fraud even though every case appears to show irregular entries on the documentation. Further, FOS, ASIC and the financial institutions involved have failed to produce LAFs or missing pages in the LAFs for Brailey's members upon their request. ASIC responded to some 70 complaints with a form letter advising victims to get a lawyer. Plaintiff lawyers contacted by BusinessDay said the problem with a legal redress to loan fraud - rather that regulatory action - was that in most cases the victims had received a benefit (the loan funds) even if they could not afford to fund the loan. The effect however of inflating the customers" borrowing capacity was that many borrowers could no longer afford to finance their loan repayments. Had there been no tampering with the LAF therefore, the customers would never have been lumped with loans whose repayments they cannot meet. Brailey describes the regulatory failure as "Australia's sub-prime scandal." Unlike the imbroglio in the US where the systemic sale of "securitised" or bundled-up mortgages enabled the banks to lower their lending standards and sell more mortgages, lending standards in Australia appear to have been relaxed by inflating borrowing capacity on Loan Application Forms. America's largest bank, JP Morgan, has just reached a $US13 billion settlement with the Securities & Exchanges Commission (SEC) to help resolve complaints against the bank. Some $US9 billion has been earmarked to cover fines and penalties and $US4 billion goes to struggling home-owners. As to the systemic nature of the loan fraud, the Brailey submission argues the banks determined credit levels by adjusting their customers" financial details by way of a "Service Calculator." I met with another (ASIC) Commissioner in February, 2013. The Chairman of ASIC had written to BFCSA, asking that I produce the evidence mentioned to the Senate on August 8, 2012. The evidence was twofold: firstly, the service calculator was ATTACHED to the loan application form. Banks insisted the clients sign to say "we have read and understood everything" and were then given only three pages to sign from a bundle that was usually 39 pages thick" says the Senate submission. They received no copies of this bundle. The banks now say the "Service Calculator is an internal document with sensitive information." We know, as we have recently uncovered a few of these gems including the "work sheets." So if the Service Calculator's printed form was attached to the LAF, why is it classified as an internal document and why is ASIC and its (external dispute resolvers such as FOS) ... siding with the banks and refusing to use their powers to demand those copies of the entire bundle be handed over? It is obvious to our members that the LAF, and the service calculator attached, played a crucial role in the fraudulent conduct of the banks to enable automatic computerised approval of mortgage loans and credit cards. ASIC had plenty of these copies, dating back to 2002 received by the regulator, from over 90 of our members in letters to ASIC in July 2012. "An additional 53 letters were sent without the evidence attached, but with a description and a specific List of Discrepancies added after the signature was obtained and without the consumers" knowledge or authority. Why has ASIC refused assistance to consumers? Why has ASIC failed to use their extensive powers of recovery of the very documents customers ought to have been given copies of from the very beginning? ASIC responded to the Brailey claims by saying there was no evidence of the breaches to which Brailey attests and, in any case, it did not have jurisdiction to act. "Rather pursuing individual remedies ASIC's role is to take on matters where there is evidence of systemic or widespread breaches of the law," said a spokesman. However ASIC's role, which will be subject to scrutiny by the Senate as early as next month, is far broader than it claims, says the Brailey submission. According to the Australian Securities and Investments Commission Act 2001, ASIC has "the function of monitoring and promoting market integrity and consumer protection in relation to the Australian financial system." Breaches or not, 800 loans written on the back of wrong data in loan application forms is no coincidence. These are just the cases which we know about, thanks to Denise Brailey's untiring work on behalf of victims. And the failure of regulators and banks to ensure their customers get their loan documents upon request begs a thorough examination.