New revenue streams: specialist lending

Where once the sector catered primarily to non-conforming borrowers, it now has competitive products in the prime space, as well as tailored solutions for self-employed borrowers, property investors and those looking to consolidate debt. 

Brokers may encounter any of these clients – and perhaps all of them – in any given week.

But while specialist lenders have been quick to innovate, brokers are often reluctant to take them up on their offers. It is safe to say that common myths still prevail. Brokers will say specialist loans are too difficult to write, take too long to assess or are not NCCP-compliant.

In fact, a poll conducted by The Adviser’s sister digital publication, Mortgage Business, found that more than 20 per cent of readers do not use specialist lenders.

Of the poll’s 108 respondents, 22.2 per cent said they do not use these lenders although a clear majority (77.8 per cent) did.

In The Adviser’s New Revenue Streams survey, conducted in August 2014, only 12.5 per cent of brokers said they had integrated specialist loans into their business in the past 12 months.

While 54 per cent of brokers plan to integrate a new product or service offering this year, only 8.79 per cent plan to use specialist loans – the second least favourite new revenue stream after short-term loans.

Ninety-two per cent of brokers, however, said they believe additional products and services improve client relationships. These findings point to a need for more education around specialist lending.

Pepper Australia’s director of sales and distribution, Mario Rehayem, says brokers are often misled into thinking that specialist lending is solely about ‘bad credit’.

“This reputation dates back to when specialist lenders were considered only as lenders of last resort, which may have been the case seven or so years ago,” Mr Rehayem told The Adviser.

“Specialist loans are in more demand than ever before, for a range of reasons: the tighter credit policies; the need for alternative income verification to allow a genuine self-employed borrower a crack at the housing market; and to allow a borrower to consolidate their debts to increase their cash flow,” he says.

“And let’s not shy away from the fact that there are many clients that have endured a life event, such as divorce, sickness or loss of employment, which forced their hand to enter into hardship, resulting in credit impairment.”

However, Pepper clients with some form of credit impairment represent only 40 per cent of the lender’s business, Mr Rehayem says.

“I’d argue that the banks will attract at least 10 per cent of credit-impaired clients,” he says.

“We are proud to provide solutions for these borrowers who are credit-worthy – specialist lending is not taboo.”

The market today

According to the Australian Bureau of Statistics, at the end of November 2014, the value of outstanding housing loans financed by authorised deposit-taking institutions (ADIs) was $1.4 trillion.

Pepper Australia estimates the specialist lending market could account for approximately 10-12 per cent of all outstanding home loans.

Brokers who play in this space are looking at a market worth an estimated $192 billion. And that’s not even close to what it could be, claims Mr Rehayem.

“The market is very much underserved, in the sense there are more borrowers out there that are eligible for specialist loans [but] that don’t know there are alternative products available for them,” he says. “Sixty-odd per cent are just sitting there thinking there are no other options.”

The opportunity for brokers and specialist lenders is to educate not only the third-party channel but the general public. The message is plain and simple: there are viable solutions outside those major banks or non-banks that are governed by credit insurers and credit-scoring models.

Since its relaunch into the Australian lending market in 2011, Pepper hasn’t taken on any more risk – contrary to popular opinion.

“Yet year-on-year, we have more than doubled our volume,” Mr Rehayem says. “The reason for that is more and more brokers are becoming familiar with the opportunities available by utilising a specialist lender,” he says, “but I still believe we haven’t even scratched the surface.

“I would dare to say it is roughly one in 10 brokers who offer a client an alternative option outside of their original offer. It is exceptionally low.”

Need for education

According to Brett Conway, educating brokers about the benefits of specialist lending is the most significant part of his role as a Pepper BDM.

Based in Victoria, he says there are some true advocates out there who really understand how specialist lending can impact their business; but there are also others who are quite the opposite.

“It is very common that you will walk into an office and the first thing they will say is, ‘We don’t get much of your business’. But in the same suburb you will meet a broker who is an advocate who writes a whole heap of business,” Mr Conway says. “So it is an education piece.”

Whenever a broker becomes accredited with Pepper, Mr Conway makes sure he visits their business to see where he can add value.

“We are not going to write every loan they do, but there is a guarantee that they will have customers come along who don’t fit with a bank,” he says. “It is my job to help brokers understand that there is still an opportunity for them to service the needs of those clients,” he says.

By helping brokers build their businesses and tap into new revenue streams by servicing every client, every time, specialist lenders form sticky and strategic relationships with their third-party partners.

“It is a lot better for longevity than chasing rate, because in a few months they’ll be off with the next person chasing rate again,” Mr Conway says.

“With Pepper, our biggest thing is getting out there and educating our brokers, [showing] that we can enhance their business by helping all their clients.”

Mythbusters

The business is out there for specialist lenders, but some brokers still labour under the false conception that it’s also just too hard – that it’s not as easy as a nice prime vanilla deal.

This is really an illusion.

Much specialist lending business that is written for self-employed borrowers is low-doc, but that doesn’t mean these borrowers are credit-impaired. Sometimes they just don’t have their financials intact at the minute they see an opportunity and need the finance.

“We get a lot of builders or people who don’t always have their tax up to date,” Mr Conway explains. “That’s a big one that fits.

“It just means from a lending point of view that the lender wants to see a record of a successful business and the borrower’s ability to repay the loan.

“So there are two options: they can either have all their information in order – which a lot of them don’t – or they get a low-doc loan.”

It’s about educating the broker that they can do this and showing the opportunity for clients they have been pushing away, Mr Conway says, because other brokers will get them.

Accessibility

This is one of Pepper’s key points of difference. The lender will work through a deal with a broker and, unlike the big banks, doesn’t have hundreds of deals going through each week, so every deal a broker writes will be given VIP treatment.

“It is very important that we are available at any time,” Mr Conway says. “As well as the BDMs, there is a scenario hotline and brokers can speak to the underwriters directly.

“So it is a huge advantage we have and I feel that our service would be second to none in the industry when it comes to support.”

Tailored solutions

Pepper Australia has comprehensive product guides, but they are just that – guides. The groups look at every deal individually.

As Mr Conway explains, “We want to write business, not turn it away.”

Every customer is different. If they weren’t, they wouldn’t need a broker. Specialist lenders support customers that don’t fit into that prime lending space. It could be something very small where they just need that extra level of attention and understanding.

“Going through that with a broker, they will call me up, we go through a scenario, we work out where it fits with which product and we will even put a plan in place for them,” Mr Conway says.

“A specialist product isn’t the end of the road for a customer. If in the future they need to get things back on track, they can then look at a different option with us, or even move to a prime lender because they now fit in that space. We are there to support brokers and their clients to not only get that deal in today but how we can support them down the track with their financial needs,” he says.

Evolution

While customer needs may not have changed much in the past few years, what has changed, says Pepper’s white label national sales manager Vasé Marcevska, are traditional lending criteria. As a result, the doors have been opened to the possibilities of specialist lending as brokers look for alternative solutions to fit the specific needs of their clients.

Pepper has been on the front foot when it comes to listening to brokers and has adapted its business accordingly to suit their needs.

“When I started with Pepper four years ago we used an application form,” Ms Marcevska recalls.

“We then moved on to the NextGen system, which made things much easier with our aggregator partners.

“It is a simple way of connecting with brokers. If a deal is not working out with a particular lender you can simply copy that application and flick it over to Pepper for assessment.”

The group is now at stage where it can provide a one-day turnaround time.

“So if all the documents are there we can now move provide an answer to a broker within the same day,” Ms Marcevska says.

Over the past few years, specialist lenders like Pepper have listened to brokers and used the subsequent feedback to change their policies and grow their product range.

For brokers, this means more options for clients – and new revenue streams for their business.

“We have now made adjustments to our specialist lending criteria, becoming more flexible and offering products that will allow for more recent credit events, to being more flexible on cash out,” Ms Marcevska says. “We offer a wider range of products. For example, on the self-employed side we offer a prime alt-doc product as well as a near-prime and specialist product.

“That whole range has evolved,” she says. “It’s one application form, multiple solutions.”

Through its broker network, as well as its mortgage manager partners, Pepper now offers a full spectrum of products.

For the lender, as for the broker, it’s all about capturing clients. The more clients you can service, the more revenue streams you can add to your business.