Westpac has urged the royal commission not to recommend regulation that made it harder for guarantors to underwrite business loans for family members, arguing this would cut off a key supply of small business credit to the detriment of the economy.
During a three-hour grilling in the witness box on Tuesday, Westpac's head of commercial banking Alastair Welsh defended the bank's decision to accept a guarantee from frail pensioner Carolyn Flanagan, despite her ill health and questions about the use of pre-witnessed and undated documents.
Senior counsel assisting the commission Michael Hodge, QC, raised questions over whether Westpac had properly determined that a commercial benefit would flow back to Ms Flanagan from her daughter's business as required by the Code of Banking Practice, which has legal effect.
After the loan application had been made, Ms Flanagan became a shareholder in her daughter's pool franchise, which Mr Welsh said created a "right to dividends", which was considered a sufficient commercial benefit by the bank to meet its obligations under the code.
But Commissioner Kenneth Hayne said the reality was that Ms Flanagan was highly unlikely to receive any dividend from a small, proprietary pool franchise and Westpac had merely gone through a "box ticking" exercise when assessing the benefit.
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At that point, Mr Welsh made a plea for the commission to consider the implications of any recommendations it might make that tightened up the use of guarantees by parents.
"Many parents want to back their children," he said, adding many small businesses would find it tough to access finance without such parental security because Australia "is asset rich and cash flow poor".
"The support of parents is critical," he said. He questioned whether it was appropriate that current laws and regulations required commercial benefits to flow back to the guarantor of the loans.
"It's a pretty critical issue, for Australian business, and the Australian economy, and the future."
Mr Hodge also questioned whether Westpac would be able to rely on the security provided by Ms Flanagan's guarantee if it failed to act as a diligent and prudent banker when it made the loan in the first place.
He pointed to the legal authority known as Doggetts case, which found the Code of Banking Practice could form part of a loan guarantee and when breached allowed a guarantor to reduce or avoid their liability in relation to a borrower default.
Mr Welsh later denied that manipulation of mortgage documents was common practice at the bank after questions were raised about the legitimacy of documents used to secure a loan that led to the disability pensioner losing the title of her house.
The questions have been raised at an sensitive time for the bank following broad criticisms of its processes loan approval processes raised at previous hearings on consumer finance and ahead of ASIC's civil proceedings over allegations the bank has breached responsible lending laws.
Mr Hodge presented documents that appeared to show that a Westpac banker witnessed a loan guarantee document some time before it was presented to the guarantor.
"And that's normal practice of Westpac, is it, for a banker to pre-sign a mortgage as a witness?" Mr Hodge asked.
Mr Welsh responded by saying it was not normal practice at the bank. Mr Hodge then raised further questions about the legitimacy of other documents in relation to the case study that were undated or showed other reason to be concerned.
The royal commission has previously heard that hundreds of NAB staff were involved in the false witnessing of documents that took place so regularly it was considered common practise. It was described by counsel assisting Rowena Orr, QC, as a failure of education and culture.
Late in the hearings a number of issues relating to mortgages provided to franchisees and the system of approved or panel franchisors.
ANZ general manager home lending Kate Gibson and former general manager of small business banking said around 5 per cent of the banks small business lending was to franchises.
She told the commission the bank felt comfortable providing finance to certain franchisees and therefore granted them more favourable lending terms.
Ms Gibson was also asked to walk the royal commission through a business plan that accompanied a loan application that inexplicably added back the GST component to the bottom line. The loan for $222,000 was granted by ANZ and the business owner eventually defaulted.
Another franchise owner, Marion Messih, entered the witness box late in the afternoon to detail her experiences with Westpac and the fast food chain Pieface, which was a Westpac approved franchise.
As part of process for purchasing the franchise, Ms Messih was told by the chain she would be required to roll over the mortgages for her home and investment property to Westpac.
The venture failed and Ms Messih was forced by Westpac to sell the investment property to over the loan.
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