Self-employment, illness and divorce are just some of the life situations that can see a borrower classified as specialist. With the banks increasingly unable to meet the needs of such borrowers, Australian Broker examines the alternatives
Specialist lending has long had a place in the mix of of options available to Australians sourcing credit, and that isn’t due to the royal commission. In fact, since the mid-1960s a growing cohort of non-banks have been providing alternative credit solutions across the country to meet borrowers’ residential and commercial needs.
According to the MFAA’s 2017 Industry Insights Survey, several factors have driven this trend since 2013, including the mainstream banks’ investor lending caps, repricing of loans for risk, adjustments to loan serviceability calculations, and long processing and turnaround times.
Today, specialist lending has taken on a whole new meaning by bringing new and innovative solutions to a growing number of borrowers. Instead of imitating the solutions presented by major, non-major and second-tier lenders, non-banks are innovating their specialist lending solutions.
“Specialist lending caters to any borrower that fits outside of what are considered traditional lending guidelines,” says Daniel Carde, general manager of third party distribution at Resimac.
“This can be due to their employment type, length of time in a job, credit history or repayment history. It can even be something as simple as providing a larger loan at a higher LVR.”
There are therefore multiple reasons why specialist lenders are an essential part of the broker toolkit.
“The number of borrowers needing a custom solution is growing,” says John Mohnacheff, group sales manager at Liberty Financial, which has been active in the specialist space for 22 years.
“Specialist lending is about providing tailored solutions to customers’ individual circumstances. By looking at the whole picture, we’re able to support a wider range of borrowers and help more customers.”
It’s not just a shifting of the goalposts that has driven the steady increase in demand. Another factor is that borrowers themselves are changing.
With the rise of the gig economy and self-employment, the banks have struggled to keep up with how best to assess a borrower’s serviceability and risk unless they fit into employment models that are fast becoming antiquated.
As a result, many self-employed borrowers now fall into the specialist category by default. However, what starts out as bad news for borrowers can be viewed as a prime opportunity for brokers.
“Many people are taking on less traditional modes of employment such as part-time, contract, casual or self-employed work. There are more opportunities in this space than ever before,” Mohnacheff says.
“Specialist lending can help brokers diversify in order to grow their business because specialist lending appeals to a more diverse and expanded group of customers.”
As Carde explains, there are also those borrowers who have blemishes on their credit file, for example a borrower who experienced a previous loss of employment but is now gainfully employed and wants to purchase a home. Others may have fallen into financial hardship after a relationship breakdown or illness.
“Their credit file will typically exclude them from a traditional loan. Specialist lending policies cater to this borrower type, and after a period of time the borrower could refinance to a more traditional prime loan,” he says.
“With an ever-shifting lending landscape, offering specialist lending gives the broker the opportunity to help more borrowers more of the time. In simple terms, it expands the broker’s toolkit as specialist lending policies are typically broader in terms of their risk profile.”
The bottom line is that specialist lending is far broader than many brokers may realise.
“It’s not limited to people who have had a credit event. Investors, the self-employed and families, to name a few, are all potential clients who can benefit from a specialist lender that brokers may not have previously written or considered,” says Aaron Milburn, director of sales and distribution at Pepper Money.
“The key is to understand the borrower’s situation in detail and to be able to communicate that clearly to us as the lender” Steve Lawrence, vice president, head of major clients, La Trobe Financialwho
The growing demand for specialist solutions is broadly driven by two types of borrower: those who approach a broker requesting help in accessing specialist lenders, and those who think they still qualify for a mainstream bank loan but actually don’t.
Either way, the upshot for the broker is the same.
“The key is to understand the borrower’s situation in detail and to be able to communicate that clearly to us as the lender. The more information we have upfront, the quicker and easier we can provide a solution,” says Steve Lawrence, vice president, head of major clients at La Trobe Financial.
Any applicant with a complex credit history – that is, some level of impairment – generally falls into the specialist space, and this requires manual underwriting.
In other circumstances there can also be unique properties or risk factors to consider in terms of the asset being purchased, such as childcare centres, hotels or motels, aged care loans or construction development commercial loans that require specialist underwriting skills to get approved.
When working on such deals, Lawrence offers four key tips: listen carefully and keep an open mind; ask for the whole truth and nothing but the truth about a borrower’s financial objectives and position; complete ‘reasonableness tests’ on stated income and expenses; and educate clients on their current and future options.
Although specialist loans fall outside of the traditional lending environment, they are still subject to rigorous compliance, especially given the complicated lending history and employment status of many specialist borrowers.
“Where a loan is determined to be specialist, the same responsible lending obligations and compliance requirements apply to the assessment regardless of borrower or loan product offered,” Lawrence says.
“Legislation requires that the broker and lender consider separate obligations to make reasonable enquiries of the borrower and take reasonable steps to verify such information. Whilst the legislation makes these obligations scalable – that is, what each party needs to do to meet these obligations in relation to a particular consumer will vary depending on the circumstances – specialist loans take much more time because of their complexity, and need complete manual underwriting.”
Further, Lawrence says, in complex scenarios legislation anticipates that it is reasonable to expect the level of enquiry made by both the broker and lender to be scaled up, meaning lenders ask many more questions.
“Many people are taking on less traditional modes of employment ... There are more opportunities in this space than ever before” John Mohnacheff, group sales manager, Liberty Financial
The Specialist Lending Spectrum
Source: La Trobe Financial
From super prime loans through to prime, non-conforming and what the market calls specialist loans, the range of solutions varies depending on the lender. Here is an example of how each solution fits into the mix
Capitalising on specialist
Having the ability and experience to write specialist loans is one thing. Capitalising on the rise of specialist lending solutions that have been designed to meet the needs of a growing segment of borrowers is a whole different ball game. However, it’s one that can pay dividends.
“A self-employed borrower may not have a consistent income, but when provided with a workable solution they often become a broker’s biggest advocate. They are much ‘stickier’ clients with more regular finance needs,” Milburn says.
“With guidance and support from their broker on the alternative options available, these clients tend to remain loyal and readily refer [other] potential clients.”
Pepper Money has been actively encouraging brokers to step beyond their comfort zone for some time. It’s a strategy rooted in both the trends that define lending currently and the need for a broker to deliver five-star service – that is, by presenting alternatives before their client knows an alternative is required.
“Pepper Money strongly believes that every Australian deserves to know their financial options when it comes to getting a loan, and always encourages brokers to get out of their comfort zones," Milburn says.
“Those brokers who only recommend traditional lenders whilst economic and credit conditions are continuously evolving put both themselves and their clients at a disadvantage. That’s why we believe brokers have a paramount role to play in educating clients about their options with non-bank and specialist lenders."
Many brokers still believe that using a specialist lender for a client is challenging, but that isn’t the case. As Milburn explains, the broker’s loan assessment remains the same; the only difference is the conversation a broker must have with their client.
“Brokers who only recommend traditional lenders whilst economic and credit conditions are continuously evolving put both themselves and their clients at a disadvantage” Aaron Milburn, director of sales and distribution, Pepper Money
For example, it’s difficult to manage a customer’s expectations when they don’t yet realise they are a specialist customer. Often in these cases, a broker will be approached by a client who expects to obtain a loan from a household name at an interest rate similar to what they’ve seen advertised.
“We understand this challenge. That’s why Pepper has invested heavily over the years to demystify and simplify alternative lending for brokers. Spending just one hour a week learning another lender’s credit policy makes this process easier,” Milburn says.
The circumstances and trends driving specialist lending have existed in one form or another for years – what is happening now is that societal changes are driving more people to fit into the specialist category than ever before. As rates of self-employment, divorce and illness are unlikely to decrease, this trend is equally unlikely to change any time soon.
In tandem – and as is customary in a free and open market – more solutions providers are stepping into the space to meet the needs of this growing segment of borrowers.
The heightened competition created as a result is essential for a functioning market, but it is also creating an unparalleled opportunity for brokers to make the seemingly impossible possible for their clients.