Calling a spade a spade: The trouble with guarantor deals

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Why would someone who is not a direct family member offer to act as a guarantor on a first home buyer’s loan?   Malcom Bartley, director of finance brokerage B Debt Free, says there are really only two reasons: one, because you stand to benefit somehow from the transaction, or two, because you were coerced into signing on.

Neither reason, he argues, should allow the third party to be called a ‘guarantor’.

Yesterday, Australian Broker interviewed Melbourne broker Alexander Heifetz, who noted some lenders have changed their policies surrounding loan guarantors to include non-family members.

Heifetz warned that brokers are likely to be the ones who face repercussions if the deals go sour, but Bartley says this is just the first of myriad concerns.

“The main issue I have is that we call it a ‘guarantee loan’…If a mother wants to help her son, she should be allowed to do so. But when the local baker around the corner who has nothing to do with the family says ‘I’ll be a guarantor because you talked me into it’, there’s absolutely no logic in that. If I asked you to guarantor a loan for me you’d chuckle and say ‘bugger off’- unless you were going to benefit.”

Bartley warns such situations could even give birth to a third-tier industry where there would be opportunities for a business to provide equity to first home buyers to obtain a government grant while they stamp the difference.

“There’s a huge misunderstanding of the debt administration in this country – and there are groups out there that’re saying ‘if you’re in trouble come to us, we’ll buy your property and we’ll let you buy it back’.”

While Bartley acknowledges there could be some benefits to easing guarantor requirements – namely, it would help same-sex couples to act as guarantors just as opposite-sex couples do – he says the onus should largely fall on the lender if such transactions fall through.

He says non-family guarantors should state their reasons for making themselves so financially vulnerable.

“Anything that is not direct family must be related to a business transaction. That benefit must be identified before the guarantor can be put in a position of risk. No one will take the risk just because they’re a nice guy.”

Bartley says he’s also worried about the potential for elderly persons to become victims of coercion should unscrupulous home buyers choose to pressure them into acting as a guarantor.

However, regardless of whether you agree with the concept or not, Bartley says lenders need to call non-family guarantors what they really are.

“If you’re going to call a savage canine that rips people to shreds a ‘puppy’, that’s not a lie, but it doesn’t give the true description, does it?”

 

 

 

 

  • Kym dalton on 25/01/2013 10:55:17 PM

    Brokers. CreditED has 7 episodes, one of which is almost entirely devoted to guarantors and guarantees. The episodes make no judgements nor do they provide advice. They do however concisely and powerfully "explain how guarantees work". Then the applicant's confirm their understanding and comprehension of "how they work" and what their obligations are by answering a number of multiple choice questions that have been specifically crafted to ensure that applicants' understand what is required if providing a guarantee and what the potential implications are. The questions and answers have been very carefully crafted to mitigate the potential risk, that you, the broker, may face should the borrower complain to an EDR or bring suit against you under the NCCP. Independent legal advice seeks to "prove" comprehension once removed. CreditED provides greater protection as it requires the applicant to "prove" comprehension themselves. It shifts responbility back to the borrower directly. At less than $50 CreditED is the best value "responsible lending conduct protection" going. It is not another annoying level of compliance, but an efficient and cost effective risk mitigation tool for you and your business. I clearly have't been explaining it properly. Please allow me to rectify that by calling on 1800200765. This is not a "free ad" for CreditED- I passionately believe CreditED is vital to ensure the continued viability of our industry and your business.

  • Positive Broker on 25/01/2013 4:36:25 PM

    What's the problem? Why can't a close friend help someone out if they are able? It's not always about a financial benefit. Make sure the loan is structured properly, they get good quality financial and legal advise and everybody wins. Simple.

  • Mal Bartley BFA Finance Pty Ltd on 25/01/2013 2:32:02 PM

    Both LH & Nick make valid points perhaps in a perfect world before any Guarantee is taken by a lender the proposed Guarantor must seek a "Credit Advisers certificate as to servicability and be assessed under NCCP guidelines" together with a "Solicitors certificate of independant advice".
    At least the proposed Guarantor will have access to the NCCP guidelines and legal advice!..
    Would also support the notion of Credit Advisers being professional!...

  • nick on 25/01/2013 1:38:16 PM

    I find the some feedback disturbing.A broker is not qualified to give legal advise about guarantees. Not advising the client to get independant legal advise from a lawyer is negligence at its highest level and a broker deserves and will succesfully get sued if the deal goes sour.

  • Coast Broker on 25/01/2013 11:17:00 AM

    I agree with Patrick. I structure the loan in such away as to limit the amount of the guarantee and also structure the application in such away as to repay the guaranteed amount over a quicker period of time. That comes from 30 years experience including assessment and approving roles

  • Mal Bartley BFA Finance Pty Ltd on 25/01/2013 11:16:33 AM

    Please don't miss the point of the discussion it is not about the technical detail of giving a guarantee nor the ability to mitigate risk by third party advice!.

    The point here is when a Guarantee document is used as a linking document the end result is a person signing a guarantee could be asked to pay up!!.

    So in essense why does the NCCP regulations in this country allow by default a person to entertain this risk without the same protection as a person referred to as a borrower?

    I have never heard of a solictor undertaking a needs anaylsis or serviceabilty calculation etc etc.. whilst giving advice under a solicitors certificate. Why should they?, it is their responsibility only to explain the concept of legal liabilty under the document which is not the same advice a professional broker provides to a client.

    So the message here is any Guarantor should be given the same protection of law under the NCCP.

    For the technically minded upon us:-
    Liability of Surety. the primary liability rests upon the debtor, and the surety's liability is secondary: ie it arises only upon default by the debtor.

    So it would be technically incorrect to refer to both as "Borrowers" to protect them under the NCCP. The bottom line "Securitas caveo".

    A bank can't hide the risk by calling the guarantee something "warm and fuzzy" like a "Parent backed facility" or a "3rd party advance". Which is exactly what is happening...

  • PeterT on 25/01/2013 10:43:43 AM

    How about the third reason for doing this sort of thing: You want to help someone whom you are close to, but they're not a family member.

    In the past 18 months 2 close friends have purchased properties and have been short on the deposit ($20k & $10k respectively). I gave them cash on the understanding that they pay it back as soon as they were able. In neither case did I receive any financial benefit; I didn't even write the mortgage! I did it because I like them, trust them and was in a position to help.
    In both cases the money was returned within 6 months.

  • NQ Broker on 25/01/2013 10:38:09 AM

    I think each and every deal should be looked at on it's own merits. I have written a number of guarantor loans and never had a problem. If you as a broker are not comfortable with a deal, don't write it. I refuse to write any low doc business these days because I'm no longer comfortable with it. Brokers dont have to write the deal just because it's in front of them. If they are uncomfartable writing guarantor loans (family or other) then simply explain the circumstances and move on to the next deal. Easy.

  • LH on 25/01/2013 10:22:48 AM

    Sorry Kate, but using the “independent advice” backstop is weak sauce and is not looking out for the client. Having independent legal advice is dependent on the quality of the advice. You are putting every legal practitioner on a pedestal.
    Coercion can include the legal fraternity as well. You are also assuming that every guarantor will be asked “Do you REALLY know what you are getting yourself into?”.
    If one feels strongly about something (and coercion includes people who are convinced they are doing the right thing and cannot be otherwise convinced), try and convince them otherwise!
    The time has come for credit advisors to be JUST THAT!

  • Kate Brown on 25/01/2013 10:01:03 AM

    Surely the fact that guarantor clients are having to seek independent legal advice and sign a legal document stating they are fully aware of what they are doing, negates any concern for coersion? Yes, there are people out there in the industry, as well as clients themselves, who give the rest of us a bad name and make our jobs harder, but surely the banks are aware of the measures that need to be in place to prevent any fallout from guarantor loans???

  • Patrick on 25/01/2013 9:58:09 AM

    Brokers are supposed to be licenced or authorised representative credit advisers, but we have a lot of loan salespersons and not enough real advisers in the industry. It is possible to both limit the liability of and provide some security to a third party, family or non-family party providing deposit gap support. The transaction appropriately structured . To explain in detail would be to give away my value add, as I am a true adviser not just a salesman.

Australian Broker forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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