Identifying long-term growth opportunities

And that can cost them significant business.

There is often the opportunity to write a loan – even when a client may not meet the credit requirements of mainstream lenders – but to capitalise on that opportunity, the broker must know their options.

Most important, brokers need to be able to recognise which borrowers  fit into the specialist space. No longer is ‘non-conforming’ just a nice way to label a sketchy credit history.

“It does not have a specific characteristic,” says Mario Rehayem, director of sales and distribution at Pepper.

A range of borrowers 

There are many different types of borrower who don’t satisfy mainstream lenders’ increasingly tight credit criteria, according to Mr Rehayem.

Variables such as time in current employment and type of income may mean a client fails to meet a prime lender’s or mortgage insurer’s requirements when, in fact, they can be regarded as very reliable in terms of credit risk.

Since the GFC, many lenders have reduced their tolerance for risk to keep the cost of funding down, requiring them to have tighter credit policies. Despite this, brokers can still help many of their clients obtain a loan – provided they know where to go and what is required.

Knowing the documentation needed and understanding what kind of credit history is acceptable does involve some work, but for brokers, being able to write a specialist loan can be a huge business advantage.

Dorian Trail, director of Grand Capital Finance Group and an expert in writing specialist loans, says nothing beats experience when it comes to understanding the space.

“I think it’s about just working with the specialist lenders to find what they want – getting the hang of what can be done and by whom,” he says.

Brokers who write specialist loans should focus their whole business on the space, he adds, noting that knowing the ins and outs sufficiently requires a certain level of expertise.

“It’s a bit like commercial loans: you’re either in it every day and you know which lenders do what, or you shouldn’t do it,” he says.

However, Mark Haron, director at Connective, disagrees. “All brokers can write products in this market,” he says. “Certainly the specialist lenders who are in that space – particularly the likes of Pepper – spend a lot of time educating brokers on what and how to recommend in the specialist market.”

Regulatory changes in recent years have made the specialist space more transparent, which is a good thing for brokers, Mr Haron adds.

“Specialist lending is nowadays so much better than it was before the NCCP [in that] there is a lot more clarity around it – particularly around the supporting documentation that needs to be used to enable a broker to help their clients who may have some sort of credit impairment,” he says.

Proving the value proposition

Quite possibly, the best reason for offering help with specialist loans is that a loyal client relationship frequently develops.

Clients who are in fact low credit risk, but who may simply have the ‘wrong’ type of income – or even some problems in their past – can often prove to be great clients for the future.

Serving this type of client can be of huge long-term benefit to brokers, according to Mr Haron. “It often sets up a relationship with a client for a very, very long time,” he says.

In addition, ‘specialist borrowers’ don’t usually stay specialist borrowers for long. Obtaining a specialist loan is often just the first step on a journey to a mainstream product with lower fees and rates. The earliest stages, however, are a great time for brokers to forge a strong relationship with the client.

Mr Rehayem estimates the average life of a specialist loan at Pepper is only about 2.8 years, showing that it’s not long before a specialist client is in the market for a broker’s services once again to help them obtain a mainstream loan.

According to Mr Haron, it’s a great opportunity for brokers to build on their relationship. “Once they have had a couple of good years with their lending facilities with the credit impaired lender, there is the opportunity to assist the client to move back into a mainstream lender, probably with a better interest rate structure,” he says.

By proving their value proposition initially, when the client may have been unable to obtain a loan themselves – or, just as likely, another broker may have missed the opportunity – a broker can establish themselves as first point of call for all the client’s finance needs in the future.

“It’s often a process of helping someone through, after a period where perhaps they’ve had some bad luck and misfortune and their circumstances meant they financially suffered,” says Mr Haron.

“To help them through, get them out the other side and after a couple of years, help them get back into the mainstream lending environment ... well, a lot of brokers who do that end up with very, very loyal customers,” he adds.

Opportunities for repeat business

Grand Capital Finance Group’s Dorian Trail says he capitalises on the natural progression of a specialist borrower by setting himself up to do repeat business down the track.

“Once their credit history is clean, there is no reason for them to pay a higher rate so if it is possible you take them out and get them a better loan,” he says.

“We have people who we have been doing loans for who we cleaned up 10 years ago and we have now done half a dozen mainstream loans for them,” says Mr Trail.

Brokers need to make sure they stay in contact with their clients to maintain the relationship, but for specialist lenders, there are some perfect touch points for brokers to leverage.

According to Mr Trail there are often identifiable milestones that show when it’s the right time to help the client again. For example, “we keep tabs on things like when the bankruptcy falls or their credit history is cleared,” he says.