Pioneer and Columbus arguments continue

The second day of what both parties - Pioneer Mortgages Services and Columbus Capital - told Justice Jayne Jagot of the Federal Court would be a three day legal action for the right to manage 500 mortgages continued yesterday with further cross examination of witnesses.

The mortgages were part of a pool of over 8000 home loans previously funded by Origin Mortgage management (the wholesale origination business of ANZ). They were acquired in September 2012 from ANZ by non-bank financial player Columbus Capital.

A key theme of the day was the part played by mortgage management platforms, brought into sharp focus following the discovery that a senior staff member at Pioneer had been able to make a series of fraudulent mortgage redraws in 2009, and possibly later, after she found a way to exploit a flaw in the system that allowed undetectable transactions below $10,000 to be made.

Pioneer management asserts that Columbus used the alleged fraud as a pretext to ramp up pressure to take over full administration of many mortgages held by Pioneer and indeed other businesses.

One tactic it said Columbus used was to send a letter to mortgage holders advising that a new $399 annual administration fee was to be imposed. That led to arguments and statistics all trying to show whether or not the letter had cost Pioneer any customers.

A battle of semantics ensued. At its core was whether the letter advising all Pioneer's clients of the new "facility fee", which was sent on 14 November 2014, was responsible for an above-average number of borrowers paying out their loans or refinancing and moving their business elsewhere

The Court heard from consultant Andrew Twyford, via video link from Melbourne. He was asked to evaluate whether the costing supplied by Columbus Capital's treasurer Karl Sick would be a reasonable facility fee to recover the cost of administering the home loans held in the name of Pioneer Mortgage Services.

Twyford said he was unable to come to a conclusion on the facts supplied that an amount of $399 was "an appropriate costing" for the facility fee, and described it as "not a justifiable charge."

The legal representative for Columbus challenged this, asking if it was a moral judgment. Twyford replied that he "would have expected that the funding structure put in place would have been sufficient [to cover costs], and should have been disclosed" at the time the loan started.

Then Sick, treasurer for Columbus Capital, continued from where he left off on Wednesday afternoon in the witness box and agreed that Columbus had 8000 loans under management, with some parts of the former ANZ Origin portfolio not performing as well as others - even before they were acquired from ANZ in 2012. Pioneer was not in that underperforming group.

He gave as an example, Royal Guardian, which had already been taken over by ANZ prior to the sale of those mortgages; likewise, MAS was terminated as a mortgage manager post-acquisition, in early 2013, for underperforming.

More problematic was the disagreement in mid-2013 over the margin to be earned by Pioneer on its part of the Origin loan book.

Here, Sick disclosed that Columbus had a target rate of return on assets under management of 50 basis points -  just shy of A$2 billion at the time of acquisition -  meaning the firm expected to earn $10 million in revenue less costs for administration, staff salaries, etc. This compared to the agreement stuck with Pioneer in August 2013 that it would be paid a management fee of 1.1 per cent (or 110 basis points) on the balance of participating loans.

Soon after, all loans were "transitioned" to new banking and servicing platforms, a move that Sick said had worked as mortgage arrears rates headed downwards from then on. The effect of this was to render unnecessary the previous banking platform systems and IT infrastructure, run by ANZ.

At this point, it was asserted by Pioneer, Columbus wanted to seize control of all of the former Origin Mortgage Management Services loan book, and the threat of a $399 fee was part of that plan - a point denied by all Columbus executives and their expert witnesses. However, Sick said: "we don't make money from discharged loans" - making the point that it was better to keep customers with small balances as there was always a chance they would redraw at some point.

His colleague, Andrew Herring, operations and infrastructure director at Columbus Capital, said he was unaware that from 2009 Pioneer needed to write directly to ANZ to run reports such as those that might have identified any fraudulent transactions - but even so, quarterly reports ran to hundreds, possibly thousands of pages.

He then explained that it was his job to send out the "facility fee" letters, not to consider if the fee was appropriate for borroweres with small balances.

Neither Herring or Sick named any other mortgage originators whose borrowers have been sent similar mass mail-outs advising that a $399 fee was contemplated.

Another key point to emerge was that, from 2009, the ANZ platform (later taken over by Columbus),was not directly accessible to Pioneer. The fraud that relied on the aging systems was not discovered until June 2014.

Andrew Chepal, founder, executive director, and chief executive of Columbus Capital, gave evidence that included an account of how the disclosure of the fraud by Pioneer's customer services manager was received. The outcome of this meeting and subsequent events have remained a anarea of dispute.

For instance, Chepal was guarded on his meeting with Pioneer's senior managers in their Gold Coast office in August 2014, conceding it was cordial, but said he did not make any concessions, such as giving undertakings to work together with Pioneer. He also denied that the fee was imposed to improve his firms' slipping profitability, nor did he agree that Pioneer would have been able to pay back the tainted mortgages, if Columbus had insisted they do so.

The case continues today (Friday, 24 July) with further cross-examinations of witnesses, followed by final submissions.


CORRECTIONS: In yesterday's erport on Day 1 of this case,there were two factual errors
1. Our earlier report had stated Williams was a witness for Columbus Capital. That was incorrect; he was called to the stand by Pioneer to explain his analysis on their behalf.

2. We previously reported the IT system was Pioneer Mortgages' system. This was incorrect. More accurately, the IT system used by Pioneer at the time the alleged fraud was carried out by its employee was one developed by ANZ, and was taken over by Columbus, once it acquired the Origin mortgage book in September 2012. It was subsequently superceded by a new platform run by Columbus Capital.

We apologise for our original inaccuracies.