By Jonathan Barrett and Paulina Duran
SYDNEY (Reuters) - National Australia Bank Ltd's <NAB.AX> system of bonuses and incentives encouraged bankers to engage in fraudulent lending practices to boost their incomes, NAB told a powerful judicial inquiry into the scandal-ridden sector on Wednesday.
Scrutiny of the bank's various incentive schemes dominated the second day at the Royal Commission in Melbourne, where the country's fourth-biggest bank conceded falsified mortgage documents were used to help people collect bonuses and commissions and beat sales targets.
"So from a very early point, NAB was aware that a driver for these ... fraudulent behaviours was its own remuneration structure," barrister Rowena Orr told the inquiry.
Under questioning, senior NAB executive Anthony Waldron said the structures were "certainly one of the root causes".
The year-long inquiry promises to shed light on the inner workings of some of Australia's biggest companies, and has the power to recommend tighter regulation and criminal prosecutions.
Initially opposed by the centre-right government, Prime Minister Malcolm Turnbull eventually bowed to public pressure to hold the inquiry after years of scandals at the big banks including poor financial advice, interest-rate rigging, and accusations of money-laundering.
Poor lending practices are expected to feature prominently, with the "Big Four" banks dominating the country's A$1.7 trillion ($1.36 trillion) mortgage market and often accused of abusing their power.
The start of the inquiry has focussed on NAB's so-called introducer programme, where the bank rewards people who are not staff with commissions when they introduce potential home-loan customers.
NAB disclosed in documents on Tuesday that some employees had accepted over-the-counter cash bribes to facilitate loans based on fake documents.
"There's been breakdowns right throughout the end-to-end process here for the application of loans," Waldron told the inquiry on Wednesday.
Some of those rewarded commissions of 0.4 percent of the size of the loan included a gymnasium operator and a tailor, the inquiry heard.
Forged loan documents and dishonest use of customers' signatures were used to enable "introducers" to collect commissions, and bank staff to earn bigger bonuses, the inquiry heard.
NAB derived more than A$24 billion ($18.9 billion) in home loans from the scheme between 2013 and 2016, when the misconduct took place.
The inquiry disclosed on Wednesday that A$630,000 was paid to introducers during the four-year period, mostly to one party.
NAB said it has since reworked the incentives programme and sacked 20 employees in connection with the scheme.
The inquiry turned its focus to NAB's larger rival, Commonwealth Bank of Australia <CBA.AX>, on Wednesday afternoon.
Mortgage broker Mark Harris said CBA pressured brokers to maintain a minimum level of "volume" with the lender or be cut off.
"The concern is that that would push brokers into using Commonwealth Bank where they should not have done," said Harris, who said his accreditation to recommend CBA loans was cancelled in 2017 because of low volumes.
Australia's four biggest banks derived A$51.77 billion from mortgage brokers in the September quarter of 2017, according to the inquiry, or about 55 percent of all residential home loans. CBA attracts more than 40 percent of new home loans from brokers.
CBA declined to comment to Reuters on Wednesday. Scrutiny of the bank's lending practices will continue on Thursday.
($1 = 1.2721 Australian dollars)
(Reporting by Jonathan Barrett and Paulina Duran in SYDNEY; Editing by Stephen Coates)