Evidence has emerged suggesting alternative lenders are offering commercial loans to non-residents for the purchase of residential property.
Loan documents obtained by Australian Broker
through an anonymous source show commercial finance firm Prime Capital approved ‘working capital’ for the purchase of an inner city apartment in Brisbane.
The 12-month business loan for $315,000 was approved on 23 March for a property estimated to be worth $575,000. Despite this being a commercial loan, the borrower’s Australian Company Number (ACN) was only registered a day later.
Conditions for the loan include a “lower” interest rate of 10.95% per annum with a “higher” rate of 2% per month applying in the event of default.
Additional fees include a 2.2% establishment fee, a monthly loan management fee of 0.2%, a default fee of $635 per hour for time spent dealing with the default, and a 2.2% termination fee.
Avoiding the squeeze
This is an example of how alternative financiers may bypass tighter regulations on foreign lending as well as the guidelines in the National Consumer Credit Protection (NCCP) Act, the source said.
“Since last year, there has been a lot of tightening up on non-resident lending so basically these non-resident investors can’t borrow anymore. A lot of private lenders have come out and now basically ask buyers to change the purchase contract into a business.”
This involves creating an ACN or Australian Business Number (ABN) with the lender then providing ‘working capital’ to that business.
“This actually makes sense in a commercial deal because it’s working capital for you to purchase property. However, this is literally playing around with words. In the end, you’re still purchasing a residential unit for investment purposes.”
Risk at all costs
The excessive fees offered in the leaked loan contract were one concern, our source said, especially since they could be further increased in the event of default.
One condition of default in Prime Capital’s approved loan is using funds for a purpose other than working capital. However, whether this condition is met by purchasing residential property is a grey area, the source said.
“It depends on the angle that you take. From the company’s perspective, they are buying a property which can be deemed as working capital but from a transactional perspective, it’s borrowing to buy a residential unit.”
This means there is a risk that the borrowers in these schemes could eventually have their properties seized, he said.
“Obviously, the company has the right to take the property away from the borrower but they may not because they’ll lose business in the future. It may or may not be the case that they want to take the property – it’s a matter of what makes more money.”
Prime Capital told Australian Broker
of the challenges in the early application stages to confirm all details provided.
“We can confirm approvals are conditional, including being subject to items like valuation and any required clarification around use of funds/commercial purpose. It is a condition of our funding lines that our lawyers (Dentons and Kemp Strang) review all files before settlement to ensure compliance with our lending guidelines and all regulatory requirements,” they said in an emailed statement.
Regulated or unregulated?
If an unregulated commercial loan is written which should have fallen within the regulated residential mortgage space, there can be quite hefty fines as well as sanctions by the Australian Securities & Investments Commission (ASIC), Elise Ivory, partner at law firm Dentons, told Australian Broker
“If they have an ACL and they’ve treated a loan as unregulated when they shouldn’t have, that could have implications for their licence.”
There are also implications for the borrower if it is determined they had defrauded the lender, Ivory said.
Determining whether a borrower is guilty of fraud is a difficult question that depends on a range of factors including who structured the loan, whether the lender or broker made recommendations or whether the borrower was acting alone.
Proper usage of funds
To ensure that funds are used for the purpose originally stated, lenders should note exactly where the loan proceeds are going on settlement, she said.
“Look at the cheques that are being drawn, look at the transfers that are being made – actually look at how the funds are being dispersed. That’s probably the best way to see what’s going on.”
A red flag for working capital being used to purchase residential property would be a cheque for the entire loan amount going to a third party the lender has never heard of, Ivory said.
“They would need to check why that party is being paid, who they are, what they have to do with the transaction. We normally recommend that any funds dispersed in excess of $10,000 must be investigated in terms of why that cheque is being paid to whomever it’s being paid to.”
“Lenders certainly can’t close their eyes to what the loan is actually being used for and pretend that just because they were told it was working capital for a company that this is exactly what is being done with it.”
Beware the newborn firm
Another big red flag is that if the company has only just been established prior to the loan, Ivory said, adding that further questions should be asked at this point.
“Why has the company just been set up? Has it been trading before? What is it going to be doing? If it was set up last week and suddenly it needs a large amount of money, the lender should understand what that money’s being used for.”
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