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To lend or not to lend

By Niall Cook - posted Monday, 21 January 2008

There's a very interesting post on Troppo and also here in On Line Opinion  by Nicholas Gruen which is attracting some equally interesting commentary. It's a boring subject. Money, and the administration of it by supposed predatory lenders.

Having been a lender in many financial institutions dealing in retail, commercial and agribusiness funding, and held discretionary lending authorities of almost $1 million, I'm more than a little bemused by the outcry of some over “predatory lenders” or “predatory brokers”.

Yes, I'll agree that there does exist a certain minority element within the industry which actively seek out the easy mark, the desperate “gotta-own-the-Great-Aussie-Dream” punter and deliberately market the Lo-Doc or No-Doc lending products to them without concern for the Five C's of Credit.


As Nicholas accurately describes, Lo-Doc/No-Doc loans are a self-certification of income product first floated by non-bank lenders more than ten years ago, aimed specifically at the self-employed borrower who doesn't have to stick to the July-to-October taxation submission timetable for returns. Great products, but with a very narrow field of application. The self-employed borrower.

Of course, some lenders have evolved PAYG Lo-Doc loans, catering for those borrowers who - for reasons of their own - don't want to reveal the facts and figures of their PAYG income - payslips, taxation assessment notices, and so on.

Frankly, I have a problem with anyone who is employed by someone else, whose employer issues payslips, and said employee of whom lodges taxation returns, claiming they can't or don't want to provide hard evidence of that income. Some circumstances exist, but they are extremely rare, where I'd change my opinion, but in general if you're PAYG, cough up the evidence.

The PAYG Lo-Doc does not, however, constitute predatory lending practices. Nor does the use of such products by self-employed persons. These products are made available by funders as a means of meeting a market demand. It's the borrower who opts to borrow in that manner. Funders, as Nicholas states, will undertake their own prudential analysis of every single application, be it fully verified income-wise or not. The ways and means are many and varied, suffice to say that lenders know more about income statistics and market averages than any other institution outside of the ABS. The real problem from a “predatory” perspective lies with a concept known as market share.

From the moment non-bank lenders - RAMS (happily, no more after today, effectively), Aussie Home Loans, Liberty Financial, Bluestone Mortgages, Pepper Home Loans and so on - came on the scene, and showed Mr and Mrs Punter that the banks had lied to, and cheated, them for decades the genie, of what some call predatory lending, was out of the fiscal bottle.

The non-bank lenders with their penchant for lending out short-term foreign market funds, corporate investor funds, superannuation, unit trust - in fact any other form of short-term invested capital they could lay their hands on - as long term loans, created a brand new paradigm which the banks struggled to come to terms with. While the chook wheel of funding kept turning - money in, money out and the music goes 'round and 'round whoa-ooh-ooh-oh-oh - everyone was happy.


In fact, one only had to watch Four Corners a week or two back to gain even the thinnest veneer of understanding to grasp how the whole shebang worked. How the entire circus tent could so easily come crashing down on the crowd gathered under it.

Borrowing short and lending long works fine while-ever the roll-over of the short term funding is sanctioned, but when those who lend the lenders their short term money decide the risk element becomes too great, and stop lending, the house of cards suddenly collapses.

The long term loans - home mortgages - are out there and somebody has to pay. In some cases, as in America, the borrowers cop the increased cost of the short term money as it rolls. Why does it increase? Because the risk of the rolling over those short term loans is deemed to be greater. Whether that risk is real or perceived doesn't matter a dot. That it is perceived at all is what matters. Take a look around the domestic institutions at present and note the level in fixed rates, Lo-Doc and No-Doc loan rates. Risk is finally being perceived and the borrower, existing or intending, is paying.

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First published at Hyperidian Bannerman on October 2, 2007.

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About the Author

Niall Cook blogs at Hyperidian Bannerman.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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