Finding the easy solutions

In some cases, they may have already been rejected by a major bank, or they could be worried about their financial future due to previous events or their current circumstances.

A complicated past, however, need not mean a complicated future. Brokers are uniquely qualified to assist borrowers who fall outside the traditional lending guidelines.

Brokers’ extensive access to lenders, their ability to find solutions and their knowledge of the lending market enables them to offer borrowers advice, insight and solutions that they may not previously have considered.

Specialist lending may require special skills, but they are skills that brokers already have.

Pepper’s director of sales and distribution, Mario Rehayem, says brokers who cater to this market are able to offer more people a greater number of solutions, ultimately benefiting not just the borrower but also the broker’s bottom line.

“Brokers who choose to support a broad spectrum of products, including specialist home loans, will be better equipped to say ‘yes’ to their clients more often,” he says, “especially when the clients are unable to conform to the traditional lending criteria of the banks.”

From there onward, the same process applies, according to Mr Rehayem.

“The same fundamental rules apply that are in place for prime clients,” he says. “The broker must identify a benefit to the client, evidence their capacity to repay and deem that the loan is ‘not unsuitable’.”

Beyond helping the borrower, catering to this market segment can also help the broker and their business.

By now, brokers would be used to hearing that diversification can help increase the sustainability and profitability of their business.

Should you choose to embrace a diversification strategy, specialist lending could be for you.

Specialist clients, according to Mr Rehayem, could require future investment loans, insurance and auto and equipment finance, offering you a platform from which to diversify your revenue stream.

Helping these clients find solutions, and putting them into a specialist loan when others have said ‘no’, will help you become their trusted adviser.

Despite the benefits that flow from helping specialist borrowers, some brokers are still wary of this market. These fears, however, are largely based on inaccurate information.

Jon Denovan, a partner at law firm Gadens, says the market is completely legitimate and does not exist on the cusp of NCCP legislation.

In addition, the perception that non-bank and specialist lenders always have higher interest rates and are therefore unsuitable in some circumstances, is incorrect, he says.

“[The Australian Securities and Investments Commission (ASIC)] once said that an interest rate of 30 per cent per annum on a home loan will not be unsuitable if the customer can afford it,” he says.

“A higher interest rate is irrelevant so long as the customer can repay it without hardship.”

Low doc lending is also completely compliant when carried out correctly, according to Mr Denovan.

Brokers who help borrowers secure this type of loan have to provide alternative documentation. The perception that it is ‘less work’ and ‘more risky’ is therefore incorrect.

In late 2011, ASIC released a report (REPORT 262: Review of credit assistance providers’ responsible lending conduct, focusing on ‘low doc’ home loans) that gave brokers further guidance about how to legally cater to this market – and highlighted where some of them were going wrong.

“Credit providers originally introduced home loans promoted as low doc for consumers who were unable to provide traditional methods of income protection, such as pay slips,” the report states. “This enabled consumers to obtain home loans where they otherwise would not have been able to do so.

“The National Credit Act contains responsible lending obligations that, among other matters, require credit providers to make reasonable inquiries into and verifications of a consumer’s financial situation to assess whether the consumer will be able to comply with their financial obligations without financial hardship.”

This, of course, is part and parcel of what good brokers are already doing.

In this Broker’s Guide, The Adviser will outline the shape of the current market, how brokers can tap into it, and some of the products and solutions now available.

The guide also speaks to brokers who have used this market to grow their businesses, catering to a largely under-serviced segment of borrowers.