Pepper: hot, hot, hotter!

Patrick Tuttle (CEO): Pepper was founded in March 2001 and was a real pioneer of the non conforming market in Australia. We had a sister company in the UK called Future Mortgages and our aim was to promote the specialist market here in Australia; particularly for self employed borrowers and those who had adverse credit histories and needed debt consultation.

David Holmes (COO): Our experience in the UK enabled us to bring those successful techniques to the Australian market. With other specialist lenders launching at a similar time it was very good for the local market; it widened the choice and widened the noise around non conforming. More brokers started to hear about it, became interested in it, and the market grew rapidly from then right up to the GFC when all the lenders in the non conforming space really were at the height of their growth.

Patrick Tuttle: When Pepper came into this market it was completely underserved. Any borrower who fell outside traditional bank-lending criteria was ignored. I think prior to us, any of those borrowers were hit with ridiculous rates of interest – punitive rates of interest. We came into the market and took a position wide of standard variable rates but still very affordable. We were charging a risk premium for taking on groups of customers that fell outside traditional bank lending. We could charge a slightly higher rate for past credit impairment, consolidating more debt than mortgage insurers would permit and the rates were always there or thereabouts.

The GFC arrived in 2007/2008, but rather than the hammering many of your competitors took, it actually turned out to be a defining moment for the Pepper business?

Patrick Tuttle: It turned out that way. The line in the sand for us was August 2007. Our board at that stage was heavily based in the UK and they were giving us strong signals that the debt capital markets were getting difficult in Europe. We were ultimately relying on securitisation to fund the business, and we were instructed to slow origination volumes down. At the time we were writing about $120 million of settled mortgages per month, we were on a billion-per-annum type run rate. We took it down from $120 million a month to $25 million; it just made more sense to slow things right down. We then made a conscious decision to move into the loan servicing market and that’s really how we survived the GFC and by 2008 a lot of other non-banks started to fall over.

After the GFC Pepper really changed; the market was emerging and then GE Money’s home-lending business in Australia and New Zealand was put on the market. It had about a $5.2 billion portfolio and we went up against the likes of CBA to procure it and ultimately we were successful in buying that business. Literally, overnight, we went from 85 staff with assets under management of about $2.5 billion to 170 staff with assets under management of almost $8 billion. It was a real game changer for us.

Heading into 2015 the business has well and truly diversified from what it once was. What’s the core part of the Pepper business now?

Mario Rehayem (director of sales and distribution): The core part of the Pepper business is and will always be as a specialist lender or a non-conforming lender. But you’re right. As the business has evolved we understand that we need to extend our product suite for prime lending and prime products. We’ve listened to the broker market, we’ve listened to our borrowers, and we want our customers to stay with us. In the past we’ve had specialist, non-conforming products, but now we can offer a transitional product range. What is it the broker needs? What is it the market needs? We always try and come out with a product to suit that and one that will differentiate us in the market.

You’re wholly dependent on the broker channel. What are the issues you’re hearing from brokers and what are some of the improvements you’d like to see?

Mario Rehayem: We’re morphing from a specialist lender into lending for commercial, consumer and auto as well. Yes, there are more asset classes we’re entering the market with, and the Pepper brand will grow on its natural course. We’ve been trying to get the Pepper brand out there – our sponsorship of the Western Sydney Wanderers is just one way we’re doing that. Brokers have been very complimentary [of the sponsorship] because it makes their job easier to offer Pepper products. We have a strategy from 2015 and beyond to lift the profile of the Pepper brand both as a direct strategy and in the broker market.

Can it be difficult for Pepper to get customers’ attention when you’re competing against such household names such as ANZ or Westpac?

Mario Rehayem: For some brokers it remains a challenge, but it’s a challenge for any broker that offers any white-label product out in the market. We’ve found that customers are less interested in the actual loan. Instead, what they do like is the actual experience and, as a business, that’s what we concentrate on. You give a customer a bad experience, no matter the brand, the customer won’t forget.

Patrick Tuttle: The important thing here is the financial strength of the Pepper group. We can now promote to brokers that we currently manage $27 billion of Australian mortgages and other assets, we’re in five countries, we have 1,200 staff, we have a very large balance sheet and as we lift our presence in direct branding, that will make brokers’ jobs much easier in terms of explaining who Pepper is and how we differ from the major banks. Our long-term goal is to build Pepper into a very broad, independent financial services company and, as a result of the GFC, there’s been a void there. A lot of those household names – Wizard, Aussie and others – have been consumed by the big banks, so our position is to be a truly independent player that offers a real alternative in the Australian market.

Pepper’s known for being a specialist lender; however, you’re now playing in the prime space. How are you communicating that to brokers and customers?

David Holmes: Everybody seems to relate specialist lending to bad credit; it’s not that. Only about 40 per cent of our customers have some form of credit impairment on file at all. We help a variety of people for different reasons and we allow them to buy their homes and grow their businesses – there’s a wide range of people we can help. Particularly it’s small businesses who struggle with the banks. What we do is look at alternative ways to verify people’s incomes rather than the norm of your last two years’ worth of tax returns.

It’s a cliché, but you play in the space the banks don’t. How true is that? And really, is that good news for Pepper that the banks aren’t interested?

Patrick Tuttle: The big banks have tightened their credit criteria since the GFC, so there are a lot more regular borrowers who typically would’ve got a bank loan but are falling out for things like automated credit scoring. It’s an underserviced market that borrowers want to take advantage of.

Specialist lending can deal with unfortunate scenarios such as divorces, business failures and bankruptcies. Are brokers always emotionally equipped to do that sort of lending?

Mario Rehayem: Brokers who use Pepper get more kick for their business because of the emotional transaction that you talk about. How many times have these clients been knocked back by a major, a branch, or even another broker who doesn’t understand the specialist product suites? And when the broker can help, they’re seen to be really giving them a helping hand. If a client is just chasing rate you’re going to lose that client pretty quickly; if not today it’ll be tomorrow. But when the transaction is an emotional transaction you’ve got the customer for life, you helped them when they’re down and out.

Is Pepper planning to acquire any more local businesses or, because of your success, could somebody be looking to acquire you? One of the big four, as an example?

Patrick Tuttle: We’ve grown through acquisition but it’s not been acquisition for acquistion’s sake. We’ve targeted specific properties, for example the GE loan book becoming available in Australia. I think it’s about growing what we already have. We’re now entering into the consumer/auto space, we’ve hired a very experienced team for that and we think that will help diversify our products. We’ve segmented mortgages into prime, near prime and non conforming, and we think the next thing would be to test or pilot a direct channel. When you’ve got a broader product it means your return on investment is greater if you can sell more products. If we were just selling specialist mortgages it would be a far too expensive channel for us to go into. Again, it will only be to complement our third-party broker and aggregator distribution, but we wouldn’t rule out further acquisitions if we thought they were complementary to the vision of the business.

A major gripe of the recent Murray Inquiry is that regulation is stacked in favour of the big four when it comes to residential lending. What’s your opinion on that?

Patrick Tuttle: I think there are some regionals who are complaining but they’re using the basic bowl three modelling and not the sophisticated modelling that the banks use. Banks can arbitrage those rules by getting a lot lower level of capital to be held against mortgages. For the non-banks, we’re not regulated by APRA because we’re not deposit-taking institutions. I understand the regionals’ position but it’s not a position the non-banks share. Our biggest issue is that we need to see active debt capital markets and securitisation markets – where there’s investors looking to buy mortgage-backed securities or asset-backed securities. So long as nothing comes out of the inquiry that prohibits a liquid securitisation market I’m broadly comfortable with the level of competition because it enables us to fund ourselves competitively and create products that can play in the niches that we are focused on.

Lending standards – or a lack thereof – and low-doc loans are back in the news. What’s Pepper’s view of that?

David Holmes: Lending standards in Australia are some of the highest in the world and they haven’t slipped at all. There have been articles in the press about the return of low-doc loans but that’s misplaced –there aren’t low-doc loans in the marketplace. We play in what we call the alternative income verification side; it’s a different way of verifying a self-employed person’s income. Instead of the traditional two years of tax returns we would look at up-to-date business statements, BAS statements or up-to-date figures from someone’s accountant. And what that enables us to do is to see what the company is doing today.

Patrick Tuttle: What low-doc was – pre the GFC – was people giving a stated income, signing a stat dec and there was no verification. The LMI companies actually permitted lenders to accept loans on the back of stat decs, which is why they got the term ‘liar loan’. Pepper has always asked for supporting documentation and always will. We never even refer to the term ‘low-doc’ because for me that’s the old stat dec way of lending and frankly that’s been outlawed by ASIC and you can’t do it.

Pepper became a sponsor of the Western Sydney Wanderers a couple of seasons ago. What was the thinking behind that, and you can’t deny the return on your investment considering the team’s recent Asian Champions League success?

Patrick Tuttle: Culturally I think we’re both entrepreneurial organisations. The Wanderers are growing fast, Pepper has grown fast over the past few years. I think we’ve also been able to help each other over the past few years in different aspects of our business. For us it was never ‘put the logo on the shirt and walk away’ and the Wanderers are very good at getting the sponsors to collaborate and work with each other. They get the CEOs of Nike, NRMA and all the other sponsors together to see how we can work on things.

Does Pepper see itself as fast, nimble and dynamic? The antithesis to the big banks?

Patrick Tuttle: Yes, our tagline is ‘Can do’ and we can be a disruptor. And we want to be quirky in terms of our marketing and we want to get noticed because we are a smaller player. But you’ve got to back that up with the products and the service.

David Holmes: And that’s why the Wanderers are a perfect fit. We also believe in western Sydney; it’s a vibrant area that has been brought together by the Western Sydney Wanderers and we believe in enhancing that, in bringing financial services to the area and working with the community. The Wanderers have 130,000 members; it’s a big influence they have over that area. The even better thing with the Wanderers is (with their recent Asian Championship win), it gives you global enhancement of your brand.

Lastly, business is going great for Pepper. One in two loans is now written by brokers. Can the good times continue?

Mario Rehayem: We want to remain the dominant specialist lender in the market. And that means we’ve got to keep backing up, being consistent in our service delivery, and having the right people on the ground. We believe there are three major areas we have to service really well. Number one is our internal things like sales, credit and marketing; we all work together as one team. Then we have our aggregators, our brokers and our white-label partners who we need to ensure we’ve given the right products and service. And the third one is obviously the borrower. I think where a lot of lenders fall short is they concentrate on one of those to the detriment of the other two.