Borrowing outside the box

Whether you are yet to dip your toe in the specialist lending space or already familiar with the non-conforming client, there is no doubt that opportunities abound in this growing sector. Maya Breen asks top lenders how specialist loans have evolved in the past year, how brokers can maximise their presence and create a hassle-free experience for client and lender alike. 

“Specialist lending is all about providing solutions,” says RESIMAC’s Daniel Carde, director product, marketing and strategic partnerships. Certainly, if you are a broker who enjoys problem-solving, thinking outside the square and gaining a very appreciative client, then specialist lending is for you.

As Pepper’s director of sales and distribution, Mario Rehayem, puts it, “specialist clients come from all walks of life, in the form of the affluent white-collar investor to the emerging self-employed blue collar purchasing their first home”. And it seems many people are waiting for a broker’s helping hand as Rehayem points out that six in 10 eligible borrowers are being turned down when applying for a mortgage, just because brokers are not offering alternative products to those available from the banks. “We also know prime is a moment in time, and an increasing number of clients that were deemed prime yesterday are now deemed specialist clients simply due to a lender’s fluctuating credit appetite.”

Of course, specialist loans also cater to those with ‘bad credit’ – borrowers who may have one or more negative listings on their credit file or a low VedaScore, perhaps because of unpaid bills, late repayments, previous credit rejections or becoming bankrupt. All these things can lower their chances of obtaining a loan with a traditional lender, and that’s where specialist lenders come in. “If they understand the alternative products available in the market, brokers have a real chance of helping to find a solution for these customers,” Rehayem says.

MPA asked leading lenders in the specialist arena how the sector is evolving, the opportunities it offers brokers new to these loans and how those already in the space can maximise their presence. We also explore how lenders can make it easier for brokers doing business with specialist clients and how brokers in turn can make it easier for lenders when submitting loan applications.

Changes in specialist lending
Many of the lenders were unanimous in reminding brokers that specialist loans are viewed exactly the same as non-specialty loans from a regulatory standpoint.

“I think the key for brokers is to remember that in the eyes of the regulator a mortgage is a mortgage – there is no difference between specialty and non-specialty lending,” says La Trobe’s VP and chief lending officer, Cory Bannister. “Brokers should approach all customers with the same high level of integrity and compliance.”

As a lender that has been in the business for 64 years, La Trobe has seen the specialist space grow. What were once ‘conforming’ loans are now ‘non-conforming’, in light of banks tightening their lending policies.

“From a market perspective, RESIMAC has seen tremendous growth in our specialist lending volumes over the past 12 months,” says Carde. “We are seeing more and more brokers embrace specialist lending, treating it as an extremely valuable addition to their overall service offering.” He notes that specialist lending products have been particularly geared towards ‘near prime’ borrowers in the past year, which Bluestone Group’s national head of sales and distribution, Royden D’Vaz, has also noticed.

“The near prime space (such as borrowers with relatively minor credit issues, or self-employed borrowers who haven’t completed their tax returns) has been the part of the market that has grown the most in the last few years as the mainstream lenders slide up the credit curve with their risk appetite,” says D’Vaz. “The specialist lending part of the market is definitely growing at a rapid rate, [which is] a very good reason why brokers should be playing a big part in this market.”

More than half (55%) of loans written by Bluestone are for self-employed borrowers, and as this area grows, D’Vaz says, “it’s time to dust off some of the myths and misconceptions that may exist” so that brokers don’t watch opportunities pass them by. “Post-National Consumer Credit Protection Act [NCCP] there is a sentiment that some brokers may be sticking to prime mortgages because they mistakenly think non-conforming or specialist loans are non-compliant with NCCP. This is certainly not the case. NCCP legislation actually adds to visibility and transparency for clients, helping to foster that image of professionalism.”

Troy McLachlan, general manager of Future Financial, which also has a niche in the self-employed borrowers space, agrees. “Brokers can feel very confident that by simply complying with their responsible lending obligations, as in their normal course of business, writing specialist loans are compliant under NCCP and provides a valuable income stream that complements their existing business.”

As more brokers embrace specialist loans, so, too, do more consumers choose to seek alternative options to the traditional lenders, says Bannister. “Thanks to the great work performed by finance brokers choosing to present specialist alternatives to their clients, consumers’ acceptance of lenders other than those occupying ‘main street’ has also increased significantly, with the APRA changes getting plenty of airplay in the media, effectively resulting in free advertising for the specialist lending market.

“A driver for future growth in the specialist space is likely to be the take-up of millennials (Gen Y) and the iGeneration (Gen Z), who are more likely to accept challenger brands as mainstream alternatives, so the future looks bright.”

A sector of opportunity
“To be able to offer specialist lending solutions to clients opens a host of new opportunities for a broker’s business,” says Natasha Sultan, national sales manager at Australian First Mortgage (AFM). “A broker opens a whole new market segment for their business when they understand the options that exist for borrowers with circumstances that don’t fit squarely in the lending criteria of traditional lenders.”

So, with growth of outside-the-box loan solutions burning bright, what are the opportunities that brokers may be missing out on who are yet to delve into the specialist sphere? Well, one thing they’re missing out on is a very loud client.

“Specialist customers are some of the most vocal about their endorsement of their broker,” says Murray Cowan, Better Mortgage Management (BMM) managing director. “They become very loyal customers and outspoken advocates for their broker. In specialist lending, if you go the extra yard for your customers, they will reward you with more positive customer reviews and referrals.”

Homeloans’ general manager national sales, Ray Hair, agrees that the very nature of a specialist loan means you will be finding a client in a difficult financial situation, but once you help them out of it they will often be doubly appreciative. “Specialist lending clients are looking for a solution to their immediate problem, arising from financial, marital or other life-changing circumstances,” Hair says. “Providing a solution to the immediate problem provides a potential opportunity to refinance the client when their circumstances improve; a loyal customer for life; and powerful referrals from an incredibly appreciative customer.”

Not only do specialist clients tend to be loyal but their situations often make them prime candidates for refinancing opportunities later on. “Brokers that diversify their core prime residential offering to include specialist or non-conforming borrowers have the opportunity to genuinely help clients access finance now, while at the same time highlight the goal of accessing cheaper finance down the track once their situation has changed or their credit impairment gets cleaned off their credit report,” says Bluestone’s D’Vaz. “This provides the broker with revenue from the newly settled loan plus the strong possibility that the client will return to refinance the loan again in 18 to 24 months.”

He adds that even if the client doesn’t need to refinance, they most often stay loyal because their broker helped them when they needed it most. “Everyone remembers the person that helped them in a time of need and helped them overcome adversity to achieve their goals. A borrower knows when their loan situation is complex. So they will respect and value the broker that can help them get a solution to suit their needs.”

 
A SLOWDOWN IN SPECIALIST LENDING?
Year-on-year there has been a fall in credit offered for low-documentation (-16.2%) and other non-standard loans (-8.5%), according to APRA property exposures data for the June 2016 quarter.

But Pepper’s Mario Rehayem said these figures didn’t correlate with Pepper’s results as it had seen exponential year-on-year growth across all its mortgage products and a solid increase in brokers choosing to use a Pepper product.

Future Financial’s Troy McLachlan also said it had seen a strong increase in self-employed full-doc and low-doc loans.

But Liberty’s John Mohnacheff said the figures were reflective of the current environment. “The drop in specialty lending might be indicative of the current low-interest environment which leads to better cash flow,” he said. “Liberty is fortunate to span across all parts of the lending market, so we’ve seen a steady increase of broker activity over the last 12 months and expect this will continue.”
Source: CoreLogic/APRA


“The specialist lending part of the market is definitely growing at a rapid rate, [which is] a very good reason why brokers should be playing a big part in this market” - Royden D’Vaz, Bluestone



Standing out
It may seem obvious, but often the most straightforward question is the forgotten one. “If you ask your customers and referrers, would they know that you offered specialist lending?” points out BMM’s Cowan. “One of the best ways for brokers to increase their presence in the specialist lending space is to let their customer base and their referrers know that they offer specialist lending.”

And keeping an open mind is vital too if brokers want to make themselves known in the specialist lending space, stresses Ray Hair of Homeloans. “Far too many brokers see specialist lending as too complex, too time-consuming and ‘not my type of business’, when in reality specialist lending provides potential clients for life.”

Product knowledge and education are also critical when it comes to specialist clients, especially when an explanation is required as to why they may or may not qualify for a particular loan, says AFM’s Sultan. “Brokers looking to maximise their presence in the specialist lending space need to focus on education, specifically around lender policies, NCCP, and the various products/solutions available to them and their clients.”

Know your products, urges John Mohnacheff, national sales manager at Liberty Financial. “The key to maximising your presence in the specialty lending space all comes down to knowing the products so you can recommend them when customers ask. Too often we hear brokers say they are hesitant to embrace specialty lending because they think it is too complicated. The truth is, it is not dissimilar to mainstream residential lending, and it can be a really profitable way to diversify your business and grow new revenue streams.”

One of the biggest challenges for brokers first tackling specialist loans is finding a niche that suits their area, be it geographical or the expertise of referral sources, according to Future Financial’s McLachlan. “We always suggest for brokers to first of all look at what loans they have had declined or even leads that they were unable to set, and then work back from there. Generally you will identify reasonably quickly the area where you may be missing out on some opportunities for income.”

 
ON THE FLIPSIDE: SHOULD HIGH CREDIT SCORES EQUAL INTEREST RATE DISCOUNTS?
Sixty-seven per cent of Aussies believe a good credit score should lead to cheaper interest rates on loan products, like it does in the US, according to a recent survey by Finder.com.au.

Only a third thought everyone should receive the same rate regardless of their credit score, and Gen Y (74%) were the biggest supporters of financial products being more heavily weighted to credit scores, with baby boomers (66%) and Gen X (65%) not as enthusiastic.

“Rewarding those with a good credit score could promote better financial management by Australians,’ said Finder.com.au money expert Bessie Hassan. “It may give borrowers incentive to keep up to date with their repayments and bills.”

But risked-based pricing could also create more difficulties for low-income or single-income households. “A national risk-based pricing system may hurt borrowers that already struggle to meet their repayments, which would make it more difficult for them to service ongoing debt, such as a mortgage,” said Hassan. “In a sense, risked-based pricing could discriminate against younger borrowers, as well as low-income earners and elderly borrowers such as pensioners.”

 
Source: Finder.com.au



“A broker opens a whole new market segment for their business when they understand the options that exist for borrowers with circumstances that don’t fit squarely in the lending criteria of traditional lenders” - Natasha Sultan, Australian First Mortgage

 


Lenders with brokers in mind
With specialist loans already demanding more time and energy, at the end of the day all parties involved – lender, broker and client – would like a loan to be processed quickly, successfully and with as little hassle as possible. We asked lenders to share methods and checkpoints they have in place to make things easier for the broker and their specialist loan clients.

La Trobe relies almost exclusively on the third party channel for loan originations, which Bannister points out has led to the broker experience being planted firmly front of mind. “This starts with making all of our products available to brokers without a requirement to be separately accredited for each. Further, we purposely use the same forms and documents for all of our products to ensure brokers have familiarity, making it easy for brokers to diversify. This extends to our residential, commercial, SMSF, and construction and development products.”

AFM makes it easy for brokers to do business by including multiple funding channels on one application form. “A broker does not need to package a whole new application if a submitted loan doesn’t quite fit,” says Sultan. “We simply reassign the loan in our system and keep the application moving. This helps limit the CRAA enquiries and runs an application through five-plus policy guides.”

RESIMAC has also employed time-saving processes in its services, using technology to provide brokers with a large array of online tools to help them through specialist lending assessment. The tools cover location suitability, LVR and loan amount limits, credit history analysis, mortgage history analysis and serviceability.

With a well-carved niche in the selfemployed space, Bluestone’s lending options are expressly designed for this type of client. “With the launch of their latest product, Crystal Blue, brokers will be able to help more customers more often,” says D’Vaz. “Three of our products are designed for selfemployed borrowers at various stages of their business. Our Business Easy, Lite Blue and Crystal Blue products cater for borrowers with ABNs that are three, 12 and 24 months old respectively.”

McLachlan explains how Future Financial has been particularly focused on removing the frustrations and guesswork for brokers from the equation via a detailed online scenario form, complete with tracking ID, a dedicated scenario hotline and a team to manage scenarios. “Our process ensures that instead of a relationship manager giving a broker a simple ‘Yes, we can consider that’ while in between appointments, we actually ask all of the relevant questions required, respond with a detailed response in a consistent, easy-to-read format, and attach all of the correct forms and calculators required to get a loan settled.” [See the product guide at the end of this feature for further details.]

“Far too many brokers see specialist lending as too complex, too timeconsuming and ‘not my type of business’, when in reality specialist lending provides potential clients for life” Ray Hair, Homeloans



What lenders look for
At the same time, there are a number of things brokers can make sure they do to make life easier for the lenders as well. Providing as much information as possible and as early as possible was a common thread among lenders’ responses. “Supplying all the relevant information and documentation as early as possible will allow lenders to assess and place accurately, avoiding problems later on in the process and ensuring everything runs smoothly,” says D’Vaz. “Not every application gets across the line, and deals do fall over for various reasons, the most common being lower-thanexpected valuations.

AFM’s Sultan adds: “If we know the full story from the outset, including the strengths and weaknesses of the application, we are in a far better position to fit it with one of our products right from the start.”

Homeloans’ Hair says just talking with a BDM beforehand can make a big difference. “The best way a broker can assist us and their client is to discuss the deal with their BDM prior to submission to ensure we have all the necessary information, understand the borrowers’ circumstances and identify any risk mitigants,” he says.

A special client
The specialist lending space is clearly one to watch as it continues to attract the interest of borrowers with its alternative solutions that are evolving each year. While many borrowers use this type of lending to move to a better credit position, the benefits it holds for brokers are long-term. These outside-the-box borrowers certainly appear to hold their brokers close to heart and remain loyal clients for life. As Bluestone’s D’Vaz says, “not only are brokers generating business for themselves by offering solutions that secure funding for their customers; there also comes a sense of reward in being able to give a helping hand when others won’t”.

BDMS TO BROKERS: TOP 5 TIPS FOR SPECIALIST LENDING
Better Mortgage Management BDMs Glen Gillespie (SA, NT and Qld), Andrew Costello (Vic and Tas) and Paul Crutchley (WA and Qld), give their five top tips for specialist lending:
  1. Always check your client’s Veda report carefully and ask your customer about anything on the report that needs clarification or doesn’t seem right.
  2. Ask your client to provide you with personal bank statements to ensure that they are declaring all debts.
  3. Don’t try to sell these products on interest rate. Focus instead on selling the products based on the solutions they offer your potential clients.
  4. Expect a thorough assessment throughout the application process. You may need to go back to your client two or three times to ask for more information. This is normal for specialist lending.
  5. Check with your lender’s BDMs about location if in doubt, as specialist lending is often location-sensitive.

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