The term “low-doc lending” often seems to conjure images of pre-GFC excess and the sort of fast and loose practices that precipitated the housing crash and eventual economic collapse in the United States. But low-doc as it existed pre-GFC no longer exists. Instead, it has been replaced with a system of rigorous checks and serviceability measures that, though different from prime lending, are no less exhaustive.
Furthermore, the term “low-doc” is often used as a synonym for specialist lending. Bluestone national sales manager Royden D’Vaz pointed out that this is a misnomer, as well as an over-simplification of a varied sector.
“The low-doc term seems to have a stigma attached to it, but specialist lending or non-conforming lending is not just limited to the self-employed borrower. Self-employed borrowers are the ones who use low-doc loans, but I prefer to see it as self-employed people who can self-certify income, or PAYG or any other type of employee who has had a significant event in the past and who now has trouble getting a mortgage. If you're looking at it in the true definition, low-doc or self-certifying doesn't encapsulate the whole industry,” D’Vaz said.
Nevertheless, “low-doc” tends to evoke an immediate response from brokers. D’Vaz said specialist lending in general tends to be viewed a certain way by brokers, and that this perception often isn’t shared by consumers.
“You know what the biggest challenge is for us? It's not the customer. It's the broker's mindset of what they do day in and day out, which is a prime loan at a low rate. Often the broker says, 'I'm not going to offer my customer that rate', whereas all the customer wants is a solution,” he said.
Brokers falling victim to this mindset could be serving as a roadblock to finding a solution for clients, D’Vaz suggested.
“What we find is the gatekeepers are the brokers,” he said. “At times, the broker tends to make a prejudgement. All they need to do is offer the client the solution.”
For a client looking for a solution, a specialist product could put them in a much better position, D’Vaz said. While brokers may have a visceral reaction to higher-than-prime rates, D’Vaz said it’s worth noting that a specialist loan could still find the borrower paying less.
“The client just wants to get a solution, and more often than not they have a mortgage, a high interest personal loan and a high interest credit card. Doing a consolidation of all that a little higher than the normal mortgage rate more often than not puts them in a better situation,” D’Vaz said.
Some brokers may also fear NCCP ramifications should clients default on specialist loans. But D’Vaz said these fears are unfounded, given the rigour with which specialist deals are assessed.
“A think a lot of brokers have some trepidation as well, because to a certain extent they're concerned about what would happen if a client defaults. But that couldn't be further from the truth, because the due diligence on these loans is not around a scorecard. Each loan is judged on its own merits. If we considered a loan not to be suitable for the clients, we wouldn't do it. We have to apply a bit spotlight on compliance. What we do is very highly focused on making sure each loan is compliant, and brokers needn't be nervous about anything,” he said.
For some brokers, acting as a barrier to specialist lending solutions is not a conscious decision, D’Vaz indicated. It’s not so much that brokers are shutting down specialist transactions; it’s that many fail to even consider a specialist solution in the first place.
“It's not a case of them shutting it down; it's that they don't even recognise it when the clients are sitting in front of them. They don't get more information. It's more than having the deal in front of them and saying no. It's at the other end of the scale where they don't even try to get more information,” D’Vaz said.
Walking customers through the deal
But ultimately, as D’Vaz said, clients are looking for a solution. And rather than be told that nothing can be done for them, D’Vaz said clients wanted to be shown a way forward. The first step in this is identifying clients who need a specialist solution, D’Vaz said.
“Our presentation is all about showing brokers how to position these types of loans. Clients don't walk into your office and say, 'Can I have a specialist loan?' They walk in with a problem that needs to be solved,” he said.
The next step is guiding customers through a plan to repair their credit, D’Vaz said. The eventual goal of specialist products is to move clients to prime loans, he suggested. As such, brokers have to reassure clients that this goal is attainable.
“These types of loans have to be sold. You have to walk the customer through it. You have to be the counsellor and the coach, and let them know that whatever it is that put them in the market for a specialist loan is temporary, and give them a plan of how you're going to bring them back to prime,” he said.
D’Vaz said it was also important to demonstrate to clients that higher rates don’t equal onerous repayments. And, once again, it’s vital to point out to clients that the higher rates are temporary. This helps put clients more at ease with specialist products, he said.
“A lot of it is around managing client expectations and letting them know it's not a life sentence. It's also selling the repayments, because customers often don't make the correlation between rate and repayments and oftentimes the repayment is not that much higher.”
A huge opportunity
In addition to helping clients who would otherwise find themselves without a solution, D’Vaz said specialist solutions can help brokers create stickier clients.
“Our BDMs are very attuned to pointing out to brokers that this is a huge opportunity. This is like an annuity type of income where you can put your customer into a loan in the specialist area, clean up their credit and then rewrite them in 18 months to two years. They definitely have to view this as a twofold revenue stream,” he said.
And D’Vaz said opportunities in the specialist market were growing as more consumers and brokers become aware of the solutions available.
“I see a huge lift in profile and awareness of what's available in this market,” he said.
As the opportunity in the market grows, so have the fortunes of specialist lenders. Bluestone exited the non-conforming lending market during the GFC, and re-entered in 2013. Since then, D’Vaz said the lender has been greeted with positive feedback and growing business.
“We're on track to have our biggest month ever. Little by little we're chipping away at the market and returning to the atmosphere pre-GFC.The brand is extremely strong, and the feedback from brokers is that they're glad to see us back,” he said.
For brokers looking to take advantage of the opportunity, D’Vaz said there were a few tips to keep in mind.
“You do definitely have to provide customers with options. You do have to provide them with a solution. You do definitely have to manage clients' expectations and have to provide them a plan so the client understands this is only temporary while they're cleaning up their credit,” he said.
Conversely, D’Vaz said there were some attitudes and practices brokers should make certain to eschew.
“Don't prejudge the client. Don't pre-empt what the response from the client would be, and don't make the decision for the client.”
Most importantly, D’Vaz said brokers should reassure clients that they are not defined by their circumstances. Likewise, he said brokers should not view specialist clients solely through the prism of their credit circumstances.
“People with bad credit are not bad people.”