Credit-impaired borrowers - Getting back on the road

THE BORROWER’S car might have slipped off the road – temporarily. But that doesn’t mean it’s a write off.

Credit-impaired applicants aren’t always the high risk they are sometimes made out to be; rather, post-GFC lending conditions have made it surprisingly easy for borrowers to fall outside lenders’ criteria whereas, traditionally, they might not have done.

Tightened credit conditions have meant that a borrower may now be disqualified from taking out a standard loan due to credit impairment for something as small as a mislaid $100 utility bill.

Bad credit has no favourites and can affect both those on a minimum wage and those with a seven digit income. A missed household bill payment, divorce, illness or a period of unemployment can affect either, and can easily result in a bad credit rating.

BACK ON THE ROAD

It is not uncommon for borrowers to be rejected by mainstream lenders based on a default or judgement listing or two recorded in their credit file. However, a credit-impaired borrower needn’t be exiled to the non-conforming channel as a result.

The simple act of completing a VEDA credit check prior to submitting an application and having any adverse listings removed by a credit repair company, such as Princeville Credit Advocates, can transform a credit-impaired applicant into a much more attractive prospect, says Carmel Mansfield, senior financial advocate at Princeville Credit Advocates.

“Basically, we use legislation and the relevant credit codes to determine whether listings have been made incorrectly and if we find they have, we request the client’s credit file is fixed to the point where the default is removed,” Ms Mansfield says.

“At this point they then may not even necessarily have to be placed in a non-conforming loan; instead, with their credit file corrected they may qualify for a standard loan.”

Clare Monkley of Love Finance is one broker who advocates running credit checks before initiating a submission – both for the broker and the borrower’s sake.

“In one case, before commencing any work on the customer’s application I completed a VEDA report and discovered that the customer had two unpaid defaults,” Ms Monkley says.

“It cost me $4.90. However, it saved me hours of work and didn’t create any unnecessary applications on the customer’s credit file.

“I referred the client on to Princeville Credit Advocates who have successfully removed the defaults and I have now commenced the application process with the customer again.”

Having credit checks performed on a client’s file will benefit both broker and borrower. It will save the broker time, given that more work is usually spent on a non-conforming loan, while simultaneously allowing the borrower to gain access to a standard loan rather than a non-conforming loan with a higher interest rate.

But not all clients’ records will be able to be cleared of their defaults, and for some credit-impaired borrowers their only option will be to turn to a non-conforming loan.

BOOST YOUR NUMBERS

Targeting a segment of the market that often struggles to obtain finance via the mainstream channels definitely has its benefits, says Melaine Burns, lending manager at Red Rock Mortgages.

“Providing a service to borrowers who ordinarily are unable to seek assistance from traditional lenders has great potential for both repeat and referral business,” she says. “You get a sense of having really helped someone.”

Credit-impaired borrowers can end up being more profitable for brokers on a loan-by-loan basis, given that a broker can charge an additional fee for service via a mandate, says Michael Watson, operations and marketing manager of MKM Capital.

And while credit-impaired borrowers do tend to come with an attractive commission rate, the chance to obtain a loyal client with refinance potential is one of the greatest advantages of dealing with this type of borrower.

To really excel in this market segment, a broker must have an understanding of what is available to the credit-impaired borrower and have the ability to offer a solution when the opportunity arises, says Allan Savins, CEO of RESIMAC.

“Credit-impaired borrowers are a sizeable segment that has not been catered to in recent years,” Mr Savins says.

“Brokers who develop the skills to offer these borrowers a ‘solution’ will find it an attractive market segment that can diversify their revenue stream.

“The flow-on effect of doing this is that brokers can create a borrower for life as these borrowers will look to their broker to assist them in finding a mainstream loan in the future, providing a good reason to ‘touch the borrower’ again for additional business.”

FROM NON-CONFORMING TO STANDARD

Brokers who are considering taking on credit-impaired loan applicants should be aware that the government’s recent ban on exit fees has presented business openings in the market not previously available.

“The demise of exit fees provides brokers with the opportunity to place borrowers in a non-conforming loan and then refinance them out at no cost when they again qualify for a standard loan,” says Murray Cowan, managing director of Better Mortgage Management.

“For example, a borrower may have a credit default which will drop off the credit report in a year but they need finance for a new home now.

“By placing the borrower in a non-conforming loan for one year, the borrower will be able to purchase the home and then refinance to a cheaper home loan in a year when the default is removed from the credit report,” he explains.

“This provides the broker with revenue from the newly settled loan plus the strong possibility the client will return to refinance the loan again in 12 to 24 months.”

Whether a broker can switch a credit-impaired borrower to another loan will, however, depend on what has caused the borrower to fail to meet the lending criteria in the first place, says Allan Savins.

“If the credit impairment is due to credit defaults or judgements, the borrower will quite often have to wait until those impairments drop off their credit report,” he says.

“However, if the impairments are arrears or missed payments only, these borrowers will only need to maintain a sound repayment history for their new loan facility and can seek to switch to a more traditional product after some time has elapsed.

“The removal of deferred establishment fees has also assisted in this process.”

However, while borrowers making a transition from a non-conforming to a standard loan present brokers with a viable stream of business, many have still not taken advantage of this opportunity, according to Murray Cowan.

“Our experience is that many brokers are still avoiding placing borrowers in non-conforming loans even though there are now no exit fee barriers to the borrower,” MrCowan says.

Brokers can, however, take advantage of transitioning borrowers from non-conforming to standard loans if they are pro-active, he adds.

A credit-impaired borrower will often decide to approach a broker directly after being rejected by a major lender, so both direct advertising and solicitors and other professionals can be great sources of referrals for this market segment.

GETTING THE MONEY

Brokers who deal with specialist lenders should not find securing a non-conforming loan for a credit-impaired borrower too difficult, given these lenders are smaller and more open than the majors, according to David Holmes, chief operations officer of Pepper.

“With tailored mortgage products for credit-impaired borrowers and direct access to the credit teams, brokers often find it easier placing a non-conforming loan than a conforming one,” Mr Holmes says.

“No extra documentation is generally required for non-conforming loans and the application and approval process are very like that experienced with other lenders.”

According to RESIMAC’s Allan Savins, “the key aspect of lending to these borrowers is to understand what led them to become credit-impaired, and the likelihood of that event recurring.

“Satisfying these concerns will make placing a borrower into a specialist loan quite simple.”

THE PRODUCTS ON OFFER

While non-conforming loans have traditionally had a lower ratio of settlements than standard loans, several specialist lenders offer products designed specifically for this niche market.

RESIMAC is one lender that has developed its specialist lending product suite not only to cater to borrowers with impaired credit but also to those who do not meet tightening credit criteria enforced by mainstream lenders and mortgage insurers, says Mr Savins.

Specialist lender Pepper has also recognised the difficulties non-conforming borrowers face – in particular, self-employed small business owners. Pepper has addressed this issue by judging each applicant individually and building solutions to meet each applicant’s needs.

MKM Capital has taken a similar approach: “[We have] three levels of risk pricing: ‘near prime’, ‘in between’ and ‘recovery’, and this allows appropriate pricing for each borrower and their situation,” explains Michael Watson, operations and marketing manager of MKM Capital.

“We are also willing to work with brokers to create a pricing schedule for each applicant’s circumstances.”

While brokers should be able to secure most of the features offered with prime loans in a specialist lender’s loan – including interest only, redraw, cash out, debit card and offset functionality – non-conforming loans will generally have an interest rate that is two to three per cent higher than that of the average standard loan.

For the broker who has a range of credit solutions in their arsenal the credit-impaired borrowers may prove to be both a client and referrer for life.