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Despite the fact that there are thousands of self-employed business owners and the gig economy continues to grow, many banks still require payslips to assess a customer’s income before they approve a loan.
Previously referred to as low-doc loans, alternative-documentation – or alt-doc – loans allow these borrowers to prove their creditworthiness.
In most cases, they are just as creditworthy as a PAYG employee; their documents are just different.
While these borrowers might not be able to go to a mainstream bank, there are other lenders that can offer a solution, and it is vital that brokers know the options they can present to their customers.
They could be looking for a variety of loans, including home loans or business loans. Many business owners will also not be able to produce their most recent tax returns.
Instead, alternative lenders can look at documents such as business bank statements, business activity statements and letters from their accountants.
With alt-doc loans, the lender will usually spend a bit more time getting to know the business.
In the past, when it was referred to as low-doc, there was a preconception that there would be minimal verification, and this sent the wrong message.
Contrary to popular belief, says Bluestone head of sales and marketing Royden D’Vaz, looking at these alternative documents actually tells the lender more about the customer.
“From a due diligence point of view, it actually tells us more about their business, more about their individual characteristics and what their business acumen is like,” he says.
“It also shows us the patterns of expenditure and how often the income comes in.”
Solutions for an evolving economy
At La Trobe, the average alt-doc borrower is self-employed, with an annual turnover of between $50,000 and $2m.
They may be unable to produce their most recent financial statements, or they may have a complex corporate structure in place that requires significant time for a credit analyst to understand.
Cory Bannister, La Trobe’s vice president and chief lending officer, says time is something that self-employed applicants don’t have.
While the typical alt-doc borrower may be a business owner, the working world has changed, and having a full-time job with payslips is not the only way to make money.
Bannister says, “We are seeing the emergence of new economies, such as the ‘gig’ and ‘freelance’ economies, along with the continued rise of the e-commerce industry, all creating a greater need for specialist lending solutions due to the temporary and transient nature of their employment and the self-employed nature of these businesses.”
Daniel Carde, general manager of third party distribution at Resimac, says alt-doc loans can be an ideal solution for borrowers with less than two years’ self-employed history, who usually do not meet the income verification requirements of most full documentation policies.
There are still responsible lending obligations for alternative lenders offering alt-doc loans.
An alt-doc borrower must have been self-employed for at least six months.
But even when the borrower has been self-employed for more than two years, they might face problems getting funding from mainstream banks.
“You will also see borrowers with over two years’ self-employment history where, for various reasons, current taxation returns are not available or the historical taxation returns are not representative of their current trading conditions,” Carde says.
“Another borrower type is those with complex financial structures where an alt-doc loan often provides the best solution.”
With more people finding it difficult to get funding as the banks tighten credit, and the growing rate of casual working, Carde says Resimac has seen more and more enquiries from these borrowers.
Flexible but compliant
As in many areas of lending, the appetite for alt-doc loans has tightened, and certain groups have pulled out altogether.
This provides an important role for brokers to play when borrowers come to them for an alternative solution.
Pepper’s head of third party, Aaron Milburn, says he has seen an increase in the number of alt-doc enquiries for the lender’s home loan products.
“We don’t think it’s going to go backwards any time soon,” he adds. With the number of banks pulling back, it is easy to ask whether this is a risky product to be offering.
The alternative lenders vehemently disagree with that.
Milburn says, “Our individual assessment of loans and risk-based pricing enable us to be more flexible with our credit policy than other lenders. This flexibility does not make us non-compliant.” For Pepper, an alt-doc customer is anyone who earns income differently.
As well as business owners or casual workers, it could be a property investor earning rental income from their portfolio.
Each application still needs to satisfy Pepper’s normal credit assessment.
It must be proven that it will genuinely meet the customer’s needs, and they still need to demonstrate that they can afford the repayments. “A broker’s client still has to prove they can repay their loan, and we still have to verify their income.
The majority of our credit assessment is the same as the banks – we simply have an appetite and flexibility to cater for a broader range of clients,” Milburn says.
John Mohnacheff , national sales manager at Liberty Group, says lenders pulling out of the space just creates more opportunities for others. But he finds that brokers still have a preconception that alternative documentation means it is harder to get a loan.
“It doesn’t mean you’re not eligible for a loan,” he says.
“If there are lots of ways of earning an income, there are lots of ways of assessing an income.” According to Mohnacheff, the rules of engagement for brokers are fairly simple.
They need not be worried about taking on alt-doc loans, because it is up to the lender to clearly set out what criteria it requires. At Liberty’s training sessions it often gives scenarios to brokers and asks them whether the hypothetical customer could get finance.
“A lot of people say no,” Mohnacheff says. “But we always encourage brokers to go through and understand the customer’s whole situation.” Taking it as fact that all lenders must meet NCCP and responsible lending requirements, it is up to the lender to determine the basis on which they assess the borrower.
Some lenders may ask for six months’ worth of statements, some for 12 months’, others for an accountant’s letter, and some for a combination. “Not one size fits everybody,” Mohnacheff says.
“It depends on the unique circumstances of the individual. Let’s say you’re a seasonal worker; there are going to be months when you’re earning lots of money and months when you’re not. It’s up to the lender to say, ‘We understand the situation here and have assessed to our criteria, and this loan fits with this person’s financial objectives’.”
At Bluestone the need for this offering is clear. D’Vaz says that while there has not been a huge spike in the number of alt-doc loans, the product makes up more than 50% of its business.
Interestingly, the group is seeing an increase in full-doc loans as banks tighten their lending criteria and brokers find borrowers who would have easily qualified for a loan in the past are failing the new lending guidelines.
Empowering brokers with education
A clear trend Bluestone sees is business owners using overdraft facilities or maxing out credit cards to fund their businesses and then going to a lender to consolidate their debts.
For brokers working with business owners, this is another area to look out for, and D’Vaz says alt-doc loans should actually provide them with a bit of comfort.
“While there might have been some reluctance in the past, I think as brokers get educated they realise you’re getting to know the business better by looking at business bank statements, by looking at their BAS, by talking to their accountant,” he says.
“Brokers can actually get more comfort not only by doing their own loan investigation but also knowing the lenders are doing a lot more than just looking at tax returns.”
In the past year Bluestone has moved into the near prime space, away from the specialised lending to highly credit-impaired customers that it was traditionally known for.
While it does still have those customers – they make up about 12% of the business – it has now moved up the credit curve primarily servicing borrowers with clean credit.
The biggest challenge for Bluestone at this time is ensuring brokers know they are in this near prime space and are aware of the due diligence that goes into alt-doc lending.
There is no automated system; an assessor makes a decision on each loan based on the borrower’s individual circumstances.
To get the message out, Bluestone is running workshops and webinars, as well as group discussions like coffee clubs.
The lender brings along its own credit assessors to allow brokers to ask questions and get answers from someone who has the technical knowledge.
The education of brokers goes beyond that, though.
“We’re doing a lot to educate them not just on what Bluestone is doing but how to understand where these clients are, what these clients look like, what are their characteristics, and why they should be diversifying into this space,” D’Vaz says.
Diversification is something most industry experts are encouraging, particularly as mortgage brokers were recently faced with the prospect of losing their trail income.
But it is not necessarily as simple as waking up one day and deciding you will now offer business loans or alt-doc loans; brokers need to know the products and what documentation lenders need. This is why lenders are providing more and more training sessions to help brokers.
La Trobe Financial has implemented a monthly scenario program to help brokers learn more about how the lender can workshop products with them.
So, whether it is a new scenario in a space they have worked in thousands of times, or they are brand new to the space, the lender is there to help.
The group holds regular webinars, personal development days and presentations to assist and educate brokers on its product range.
It is important to La Trobe that brokers understand its products.
Bannister says that as the oldest operating non-bank in Australia it has more than 66 years of providing solutions for underserved markets.
“Our core purpose since we began in 1952 is to service those borrowers who are underserved by major lenders,” he says.
“So when, for whatever reason, the banks narrow their lending spectrum as we have seen recently, we are ready to assist.” Addressing the recent tightening by banks in areas such as alt-doc loans, Bannister says, “The banks’ withdrawal has largely been due to their simplification strategy.
They do not want to commit the resources required to underwrite these loans appropriately, and that is both fine and appropriate; however, we do, and we can, and we will remain in this sector for the long run.”
Providing the right tools
While lenders continue to educate brokers about the products they can provide, the resounding message is that alt-doc is not that different from a full-doc loan.
Resimac’s BDMs, however, are on hand to train and support brokers who are submitting applications for the first time. Ultimately, Carde says, brokers need to remember that alt-doc borrowers should be treated in the same way as full-doc borrowers.
“A broker still needs to ask the borrower the same range of questions they would any other borrower type, and still needs to be comfortable that the loan is not unsuitable and that they are meeting their responsible lending obligations.”
Resimac has more than 10 years’ experience in alt-doc lending, so it is well placed to support brokers throughout the process.
It provides training sessions to both large and small broker groups, offering guidance on the types of information they should gather, what questions they should ask their borrowers, and how to package the loans ready for assessment.
In terms of technology, Resimac offers a QuickQuote tool to assist with an initial serviceability assessment as well as a security location check; the lender’s BrokerZone also includes guides and checklists for when the broker submits the application.
These tools are crucial in supporting brokers no matter what stage of their career they are at, and they help brokers in their diversification journeys. Pepper offers Pepper Product Selector, which identifies a specific product, interest rate and fees for any client in less than two minutes.
For brokers offering a diversified range, tools like this are invaluable for keeping track of all the various products.
For brokers offering alt-doc loans, Pepper has a five-step process that helps the broker position an alternative home loan with a customer who may not have been expecting a solution.
Milburn says, “Ever since we began, Pepper has led the way in terms of broker education and making things easier.
That’s why our broker toolkit arms brokers with the insights, tools and expertise to give their business a winning edge.”
The education and support are not just for the broker. As Liberty’s Mohnacheff says, the customer also needs to be educated so they understand that there are alternative products out there.
He paints one particular scenario that many do not consider. Borrowers who take out a home loan while they are PAYG employees may later change employment type, or become self-employed.
Circumstances change, but sometimes borrowers don’t appreciate the impact this can have on their ability to obtain finance, until they look to refinance or upgrade their homes.
Brokers have a real opportunity here to service these borrowers who will generally not know the difference between a full-doc loan and an alt-doc loan. “And why would they?” says Mohnacheff .
“When circumstances change, this is where the borrower will ask, ‘what do I do now?’ When this happens, there are lenders like Liberty who strive to help.
This is why I urge all brokers to not be anxious about alt-doc but to instead become familiar.”
Liberty is known for its push towards diversification and is looking at ways to make this easier for the broker so that it can in turn benefit the customer.
As well as training sessions and BDMs on hand to assist brokers, the lender has invested money in technology to make its processes simple and fast.
“How can we electronically facilitate the things that people don’t like doing?” Mohnacheff says.
“Printing off the bank statements, scanning them all – we can do that electronically.
“We will engage online, we will send them a letter, we will help the broker engage and make things easier or streamline and simplify the processes. But never to the detriment of underwriting – those standards are essential.”