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The silly rules in lending

by Troy McErvale6 minute read
Troy McErvale

I have heard plenty of ridiculous statements in lending over the years. Here are a few.

“You must have some skin in the game” or “You must put in some hurt money”

This may be the granddaddy of them all on the ridiculousness scale.

This ‘rule’ of lending has nothing to do with protecting the borrower – it is designed as a mechanism to protect the bank only. If I need to have some hurt money, why is it okay for my family members to act as a security guarantor then? I have no skin in the game under that scenario. Why can I purchase a property at 80 per cent LVR under the conditions of a favourable purchase? The real intent of the statement is to protect any bank (or mortgage insurer) against risk of loss.

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Mind you, I am not against the banks doing that – I would do the same. But at least tell it like it is, and stop squirming behind nonsense statements that you feed to the masses as if everyone but you is stupid.

“We wanted to write the loan, but the mortgage insurer declined it”

This one is alarming on two fronts. As a broker or lending officer within the bank, you should know what the mortgage insurer rules are. If you don’t know what the rules are, then you are incompetent at your job. Your job is not that hard – at least take the time to learn it properly. If you are a broker, and your client has been declined due to an LMI decline, then your incompetence is the problem – not the mortgage insurer.

But there is another side of this. A bank can lend out its own money on any loan terms it wants – if it wants to waive the mortgage insurance requirement, it can. So don’t tell me as a bank that you “really wanted to write the loan”, but then do nothing to actually back up what you are saying. What you really mean to say is “We don’t want to lend you the money for this transaction”. Once again, no problem with the decision, but honesty seems to be considered unimportant.

“You need genuine savings to show you are financially responsible”

Rubbish. What shows financial responsibility is maintaining agreed repayment terms on any existing and past credit facilities, paying your utility bills on time, showing you do not have any expensive addictions, and paying your rent on time every time it is due.

The “genuine savings” requirement is an LMI requirement – and my company’s two LMI providers are American firms. In the USA, people by and large are more entitled, treat financial responsibilities with less care, and place themselves first. The lending rules applied in the US don’t need to be applied here in Australia.

Fortunately, St.George Bank, the Bank of Melbourne and CBA have seen the merit in lending to borrowers who can cover their five per cent deposit and their costs, with history of a satisfactory rental repayment ledger being acceptable – and so have some alternative funders. This is pragmatic. This is common-sense lending. These are the lenders we should be supporting as brokers.

“You need to prove to us what your cash out is going to be used for”

The only answer to this is “Why?”

Why should you tell me what I get to spend my own money on? It’s my equity, and if I have proven to you that I have the ability to repay it, then that’s all you need to know. You don’t get to determine my future by controlling my own purse strings.

“We will not refinance any more than four (or three, or five) debts”

Once again, I have no idea why this is. If I have 10 debts and a good repayment history on all of them, and I want to consolidate them into one new loan through a refinance and will save a considerable amount of money in the process, what is the risk for you as a lender? In fact, isn’t your risk of me defaulting as a lender less, simply because I have more disposable income now?

Fortunately, some alternative lenders like Liberty, Resimac, and Pepper don’t enforce such a rule.

There are plenty more of these silly lending rules – a recent one being banks reducing the LVR on investment loans today and justifying it by claiming they are being responsible. This naturally admits to the same bank practicing irresponsible lending policies yesterday – yet we don’t think about it for a moment. Extraordinary.

I’d love to hear any of your own personal favourites – share them with me below!

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Troy McErvale

Troy McErvale

AUTHOR

Troy McErvale is the founder and managing director of Freedom Home Loans and My Personal Lender, a combined mortgage broker and mortgage management business in Australia started in 2001. Since 2010, the company has offered an expanded service to include mortgages for foreign owners of US property, as well as US property consulting services to high net worth clients.

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