Mortgage industry offence the Royal Commission missed

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On Monday, the CEO of the Institute of Certified Management Accountants (ICMA), Janek Ratnatunga noted that the Royal Commission had failed to recognize the biggest fraud committed by banks: mortgage interest calculation manipulation.

Professor Ratnatunga said that the Commission’s recent report into misconduct in the Banking, Superannuation and Financial Services Industry ably highlighted many mishaps driven by the pursuit of profits, but failed to look at the bigger picture and examine cases of erroneous calculations.

“[W]hilst there were many examples of behaviour falling below community standards and expectations such as banks pursuing of profits rather in looking after the interests of their customers in approving loans, giving biased financial advice; charging 'fees for no service' and fees dead people, and selling dodgy low value funeral insurance to Indigenous customers, Professor Ratnatunga is of the view that this is only the tip of a very big iceberg,” a disclosure from the ICMA stated.

Ratnatunga revealed that the biggest rort lay in the way banks use basic finance annuity equations to calculate monthly mortgage principal and interest repayments and the interest on deposits into offset accounts.

“The finance equations used to calculate the mortgage interest by banks are either erroneous, or are skewed to provide answers always in the bank’s favour at the expense of their customers,” he added.

Evidence to support his claim included cases where a mortgagee’s monthly interest and principal repayment stated in his or her bank mortgage statement was different from that obtained using that bank’s own loan calculator online. In one example, the disparity amounted to $14.49 per month over 30 years – a total value of $2,493.45, all going into the bank’s coffers.

When Ratnatunga called out the error, the bank countered by saying it had changed the method of calculation only in February of this year.

 “Even if the banks use the correct equations, how they apply these equations when interest rates change is always in the bank’s favour. When interest rates go up, the change in mortgage interest payable is applied immediately; but when interest rates go down, these are only applied from the beginning of the next monthly cycle date of the loan”, Ratnatunga noted.

These types of practices have been existing for at least the last three decades, netting banks billions of dollars, and they are supported by obtuse mortgage loan statements that exist to obfuscate these issues.

The Royal Commission’s interim report tackled bank statements lacking transparency in charging overdraft and dishonour fees, indigenous customers in remote communities faced problems with access to basic accounts, informal overdrafts, dishonour fees and identification issues.

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Comments
  • Jetie says on 05/10/2018 09:13:20 PM

    As a retired bank manager, I must once again correct the frequently erroneous usage term of “mortgagee”. The bank is the mortgagee and the borrower is the mortgagor.

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