Imagine the following scenario. You ask your Dad if he can offer up his property as security for a loan for your excellent business proposal, but he says “no”. So you get your wife’s workmate drunk and get him to pose as your “Dad” when you take out the loan. The mate signs the mortgage as “Dad”. The Bank gets a registered mortgage over your Dad’s property. Of course, the excellent business proposal isn’t really so excellent (maybe Dad actually knew a thing or two after all) and the business goes bust. The Bank goes to repossess your Dad’s property. There isn’t much Dad can do about it, because the mortgage is not void for fraud as long as it is registered (lawyers call it indefeasible title, we love to use long words).
Does this sound far-fetched to you? Are you thinking that surely the Bank would have some kind of procedures in place for identifying mortgagors, so that mortgages can’t be taken out by drunken imposters? Think again, and have a look at the case of Grgic v Australian and New Zealand Banking Group Ltd (1994) 33 NSWLR 202. The above scenario is taken straight from its pages.
That case always struck me as quite extraordinary. Accordingly, I read a recent submission from the South Australian Director of Public Prosecutions with great interest. The essence of the submission is that “identity theft” and “identity fraud” are on the rise. In fact, it is more common for loans to be taken out by non-existent people than by imposters. The submission says:
The credit worthiness of…[a loan applicant] is frequently determined by ‘credit scoring’ the application at a central office of the bank concerned, and only minimal verification checks are made with respect to the supporting documentation and personal details of the applicant.
It goes on to cite examples of organised criminal gangs setting up multiple loan frauds which were able to be operated for extended periods of time.
Now you might think, “Yeah, well, they’re only ripping off Banks; serves the Banks right for always ripping us off.” But such scams cost all of us money, as Bank fees have to increase to pay for non-recoverable loans and attendant litigation, the police have spend public money on investigating fraudulent conduct and prosecuting the offenders. Further, the money may be used for criminal purposes.
I think this issue also raises broader questions about the conduct of Banks. To my mind, there is a fundamental conflict of interest in the present way in which lenders give out loans. Bank staff often encourage customers to take out loans, the bigger the better. Sometimes Bank staff are quite aggressive in promoting of loan products, because after all, they get a commission for each loan they sign up. The fact that the customer may be overextending their financial capabilities can be ignored. From my experience in legal practice, I have observed situations where a borrower should never have received the loan in question: realistically, the borrower was never going to be able to pay off a loan of that magnitude. Why give a loan to a borrower who is on a knife’s edge? Interest rates rise by one quarter percent and the Sheriff will come knocking on the borrower’s door.
Signing up for a loan these days is supposed to be “easy”. You can do it over the phone or the Internet. I got a car loan two months ago without having to go into a Bank until I signed the documentation. And do you know what? They didn’t ask for identification when I went into the branch to sign the documents. I could have been an imposter. Or I could have taken out the loan without my husband’s knowledge and gotten someone else to impersonate him on the phone and in person. No one would have known.
And what about those letters which encourage you to raise the limit on your credit card? You’re managing to pay the credit card off…so let’s raise the limit so that you get into more debt and can’t pay off your card any more! I rip those letters up when I receive them: they seem deeply irresponsible to me. I have known people with financial problems where the Bank has just kept letting them raise the limit on credit cards without question, ultimately leading the person into financial disaster.
I think Banks have to be responsible about these issues. First, I think there should be better identification checks when people go to take out loans, credit cards or mortgages. Secondly, I think Banks should not encourage people to overextend themselves financially. It just leads to misery and heartache, and no one wins.
A reader has asked if I have a secret source, or if I’m just clairvoyant. The answer is, of course, the latter. Yes, it seems banks are releasing more products to make it “easier” to expose yourself to massive debt in the ever more difficult quest to get a home. Why doesn’t the government deal with the source of the problem instead? (ie, negative gearing and tax deductions for landlords but not home owners)
I do think Banks should disclose commissions received by their staff. I also think unsolicited offers of credit cards should be banned.
Of course, you can’t protect everyone. But to say there is freedom of choice and that it’s up to people to make their own judgments on offers of loans assumes that everyone is a rational, financially astute person who makes judgments in their best interests. My experience as a lawyer tells me that often people are the very opposite, particularly those who get into trouble with money.