The events of 2020 have fundamentally changed many aspects of the way we do business in the mortgage and finance world, from how we interact physically and virtually to the systems and processes we’ve embraced in order to continue operating through the periods of lockdown.
Another meaningful shift has also materialised in the course of the year, says Aaron Milburn, Pepper Money’s general manager for mortgages and commercial lending across Australia and New Zealand.
Alternative lending, also known as near prime and specialist lending, has become an increasingly important part of the lending mix – and that’s because this type of borrower has never been more prevalent.
“Quite frankly, you don’t have one type of person or one type of family that fits the alternative mould,” Milburn explains.
“Alternative lending was initially born out of the fact that people were changing the way they live and work, and their income models were changing but the banks’ credit policies were not. In the Australian market, Pepper really was the architect of the near prime product, which is now the fastest-growing sector of the non-conforming lending product cohort.”
Now, other non-banks are selling that particular niche product, and it continues to grow because, even now, the major banks are “unwilling to move their credit policies in line with how people live their lives today”, Milburn says.
“Its growth is representative of the archaic policies that still persist with some of the major lenders in Australia.
“We see it as our job to continually educate mortgage brokers not on what non-conforming lending is but on how important it is to position it as an option for your client, and to explain to them why they’re not likely to be financed by a major bank. And that doesn’t mean you’re not a good citizen or not as good as someone else – it just means your application comes with a different structure.”
“For a broker, the ideal situation is to offer prime, non-prime and specialist loans. It’s this versus giving a client one potentially unsuccessful opportunity with a major lender”
Of course, the growth and trajectory of this particular product was gaining momentum long before the pandemic arrived on our shores to well and truly shake things up.
What COVID-19 has really shown us, Milburn argues, is that the lenders that are able to identify a customer’s need and then act quickly to assist them will prevail.
“When we went through COVID, at the beginning, we reached out to every single one of our customers to see if they were in need of some help,” he explains.
“The non-bank community really led the way in helping those customers, and really quickly. I was really proud that at Pepper we repatriated 90% of our sales team to move into customer service roles, to ensure that everyone was coping OK. We made a commitment that we would not look to originate a new loan until every single family we had lent to in the past was already looked after.”
This customer-oriented, service-first approach was a philosophy that Pepper CEO Mario Rehayem was so passionate about that he and his entire executive team stepped into the trenches to personally speak to customers and see what solutions they could offer, and what needs they could assist them with.
“Mario was doing hardship assistance calls; I was doing them – he expected his entire executive team to do it, and it was a magical representation of understanding that the customer comes first, and putting their needs first is at the heart of what we do,” Milburn says.
“Without brokers, we wouldn’t have the amazing business that we have today, so we take very seriously every single family that is introduced to us”
“At the same time, we were also the first lender to protect trail commission for brokers. We knew they were helping their customers but they had families at home too, and were running their own businesses. We forced the more traditional views of the banks to follow suit so brokers could get on with the job of helping customers without worrying about their own income.”
This approach demonstrates how seriously Pepper takes the position of trust it is in when referred a client by a broker.
Milburn estimates that over 90% of Pepper’s business inflow comes from brokers, which is why the non-bank is not just committed to the broker channel: “We are the broker channel!” he says.
Aaron Milburn, general manager mortgages and commercial lending, Pepper Money
“Our job is to make sure that when brokers trust us with their customers, we’re not just there at the front end when they first get the loan; we’re there for them throughout their full journey with Pepper,” he explains.
“That’s not just a throwaway statement; it’s a very serious commitment. Without brokers, we wouldn’t have the amazing business that we have today, so we take very seriously every single family that is introduced to us.”
On that note, when a broker does consider introducing a new customer to Pepper, how can they work out whether this client fits the profile of a typical alternative borrower today?
It’s simple: they can’t, Milburn says. And that’s because alternative borrowers are “just normal people”.
“They’re actually no different post-COVID or pre-COVID. You can be a prime customer at a major bank today, and they could change their policy slightly and tomorrow you no longer fit the mould,” he says.
“With the introduction of the best interests duty, alternative lending is only going to become more important ... The very essence of BID is doing the right thing by a client”
“We have a saying at Pepper: ‘Prime is a moment in time’. That’s it. It’s only governed by the appetite of the major banks of Australia at that particular moment, and that appetite can change swiftly.”
Among the growing list of borrowers that Pepper works with are people who are self-employed, and some of these customers don’t have the income verification documents that a major bank would like to see, in the format it would expect, Milburn says.
“We have different ways of verifying income that are not so restrictive, and we’re really passionate about assisting self-employed borrowers to access credit,” Milburn says.
“For instance, it could be the case that you’ve worked in the IT space for many years, you’ve worked in the private sector for a decade with the same company, and then you leave to become a contractor. They’re often contracting back to the same company that they worked for and have a secure income stream, but that new contracting arrangement often won’t fit with a major bank.”
He adds that another huge misconception about alternative lending is that non-conforming loans are about poor credit.
“The majority of our loan book is completely clean credit – it’s just a changing landscape. Another example here might be someone who works part-time and does the odd job here and there to supplement their income. The gig economy is an area we’re very big in, and I think that’s only going to continue to grow,” he says.
“The world has completely changed, but some of the lending practices in Australia are pretty archaic, and they haven’t moved with the times. And they’re going to have to, or there will be large swathes of people who are not going to realise the dream of homeownership, unless they use non-banks like Pepper. Our research shows that if people are knocked back for a loan, it can take them three to five years to work up the confidence to apply again.”
It can be something as simple as a life event, such as an illness or divorce, that has knocked them off their feet, and now no mainstream lender is willing or able to help them.
“My ask of brokers is to look at every single customer as if they’re a friend or family member. Then I want them to consider the benefits to their job as a broker of having in their arsenal a lender like Pepper, so that those customers who are not fitting the traditional mould have still got an option to get finance,” Milburn says.
After all, if a borrower is not getting the loan from you, they’ll get it elsewhere.
“My team are the highest-rated BDM team in the market, and they continue to be year after year because they’re really passionate about helping brokers help families. If brokers want specific education, we’ll tailor whatever we can to do that. We also have free social media and marketing resources, so all you need to do is reach out and our team will be there to support you,” he says.
“With the introduction of the best interests duty, alternative lending is only going to become more important. As a broker, you can’t afford to just offer prime lending. The very essence of BID is doing the right thing by a client, and if you only deal with the major banks and you don’t deal with companies like Pepper, you can’t do that. You need all available solutions in your arsenal. That’s a fact.”
While the days of brokers harbouring an overall negative view of alternative lending or non-bank lenders are largely behind us, Milburn does believe that there is huge value in borrowers being reminded of all of the options available to them.
“For a broker, the ideal situation is to offer prime, non-prime and specialist loans. It’s this versus giving a client one potentially unsuccessful opportunity with a major lender, which has a changing credit policy that increasingly suits fewer borrowers,” Milburn says.
“That’s why we’re seeing more and more brokers come to us, because why would you want just one opportunity to help a family get into a home when we can offer three opportunities?”