So desperate was BMW to get people behind the wheel of its luxury cars that its finance company gave loans to people with zero or even negative disposable incomes and accepted false loan documents while paying big bonuses to its most reckless salesmen.
A scathing review of BMW Australia Finance found the company had loaned $27,000 to a single mother of 10 children even though she was in casual employment and had negative disposable income. It gave $23,300 to a refugee aged 21 who had been employed for just one month and whose income was overstated. And it loaned nearly $50,000 to a 76-year-old man based on earning projections rather than real income. The loan was almost twice the value of the car.
“BMW [Australia Finance] has not demonstrated a satisfactory level of organisational competency necessary to engage in credit activities efficiently, honestly and fairly,” according to the review, produced by consultant Ernst & Young and obtained by Fairfax Media.
A “strong sales culture” was to blame, one in which people with “known compliance failings” were paid “unprecedented bonuses,” while risk and compliance teams were undermanned, under-trained and not taken seriously.
The review, leaked to Fairfax Media, was the first of four ordered by the Australian Securities and Investments Commission after earlier breaches of BMW’s credit licence saw the car company’s finance arm fined $697,000.
But even after ASIC imposed those fines, BMW still boosted the bonuses paid to sales staff who maximised the interest rates they charged on loans.
Under the incentive scheme, a dealer would receive a $375 commission if they charged a customer the base interest rate of 5.49 per cent, but if they ramped it up to the maximum, 12.29 per cent, the sales commission would be $8163.
“A steep change, rather than incremental progress, is required” for the finance company to change culture and lift competency, the Ernst & Young report said. This would take 18 to 24 months.
BMW Australia Finance was given a credit licence in 2011 and trades under brand names BMW Financial Services, Mini Financial Services and Alphera Financial Services. It’s a fully-owned subsidiary of car company BMW. In the past 12 months it has written about 26,000 loan contracts.
The company budgeted just $23 per contract doing checks and compliance, with many loan contracts approved within 15 minutes. One customer, who said he was a mail courier, was approved for a loan despite claiming income of $53,000 per month.
Ernst & Young looked at 100 BMW customer files that it considered questionable. It found 98 per cent breached the consumer credit code.
In the vast bulk of these files, the finance company had underestimated people’s monthly spending when assessing them for a loan. About 90 per cent of customers’ general living expenses were said to be lower than the Henderson Poverty Index, even as measured against an out-of-date poverty index from 2010.
About 20 per cent of the files disclosed general living expenses as $0 per month, and some people approved for loans had negative disposable income. Half the files showed housing expenditure at less than $200 per month, and 11 per cent of them included pay slips or income documents “that appeared fraudulent”.
In 19 per cent of the cases examined, the loan was worth significantly more than the car’s value, meaning that, if it was to be sold to pay off the debt to BMW Australia Finance, the customer would still owe money. Some of BMW Australia Finance’s clients who were dealt with under the “hardship” obligations would actually be made worse off.
“None of the 100 files assessed demonstrated that the consumer was provided with a credit guide,” the report said.
BMW said in a statement that the company’s financial arm had been co-operating with ASIC “to ensure the company is updating its processes to meet all regulatory obligations”.
It stated BMW Financial Services was “fully committed to implementing a business model which reflects the industry’s best practice compliance, business processes and customer service.”