Evicting a blind old woman is Westpac's public relations debacle

Big business borrowers have size on their side, consumers have a significant measure of protection through laws - but small business borrowers are deficient on both counts when it comes to dealing with banks.

In many respects small business borrowers share many more characteristics of a consumer in that they are unsophisticated, woefully light on the power scale against a major bank and they often use residential property to secure a loan.

As for the often aging parents that provide guarantees for their children’s business loan using security of their homes - they appear to be right at the bottom on the protection pecking order.

A case study to highlight the plight of the family guarantor, and the immorality of banks, could not have been more impactful than Monday's witness Carolyn Flanagan.

Even Westpac’s general manager of commercial banking, Alastair Welsh appeared overwhelmed by Flanagan’s health and fragility when he entered the witness box to respond the issues of loan guarantors.

Flanagan, who had guaranteed a business loan to her daughter, was blind, had suffered a stroke, had difficulty speaking and limited memory recall.

And while this rendered some of her testimony less than reliable it must have raised an almighty question mark on her competence to fully appreciate the guarantor documentation she signed.

Head of commercial lending at Westpac, Alastair Welsh, arrives at the royal commission.
Photo: AAP

Westpac’s own policy says bankers need to make sure a guarantor makes a "fully informed decision" and ensure they are "fully aware" of their potential liabilities.

Counsel assisting Michael Hodge suggested the banker dealing with Flanagan didn’t fully discharge this duty.

An internal Westpac Banking Corp lending policy instructs its business bankers to "exercise extreme caution" when dealing with parents who are providing guarantees for business loans involving their children.

Flanagan’s blindness left her unable to read the documentation - which had to be read to her and she needed to be pointed to where to sign.

When Westpac ultimately called on the guarantee Flanagan was facing the prospect of her home being sold even after the case had been taken to the Financial Ombudsman which found in favour of Westpac.

It was only after a second attempt by legal aid to appeal to the hardship division within Westpac that the bank allowed for the exercise of the guarantee to be stayed until Flanagan died or sold her home.

Welsh said that Westpac’s process had been properly followed but admitted that it could have been handled better.

From Westpac’s perspective it was a public relations debacle - right up there with the Commonwealth Bank’s financial advisers charging dead people for advice and NAB bankers receiving envelopes with cash as bribes.

Legal Aid NSW consumer law specialist Dana Beiglari
Photo: AAP

The whole issue of relatives - particularly parents going guarantor for their children’s loans is one where banks need to be additionally careful.

The commission heard that all the bank really needed to know is whether the guarantors had the money to make good if the loan defaulted. It did not need to worry about what financial conditions it left the guarantor in.

Dana Beiglari - the Legal Aid NSW worker who assisted Ms Flanagan - said she has seen parents want to put family first, or feeling pressure to do what their child asks to preserve the relationship. As a result she said they might be less inclined to get independent legal or financial advice about the implications of using their home as security.

It was “very rare” for clients to understand that Centrelink pension payments could be reduced or cut off if the loan was called on, and this could have stress on the family unit.

Beiglari said her clients often had a limited recollection of the circumstances of signing up to the guarantee, perhaps because of limited literacy skills, but often because the child has done most of the logistics.

“In those cases my client very often can’t describe the circumstances of signing up to the guarantee beyond going to the bank, usually just one time, accompanied by the son or daughter,” Ms Beiglari said.

But from the small borrower's perspective, using the equity in a parent's house is often the only prospect of successfully applying for bank finance.