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I'm sure I speak for other aggregators who are having the same headaches in the growing private lenders market, and I continue to alert our broker network to be very cautious of lenders advertising that they operate in this space.
Private lenders are not governed by regulatory bodies; neither do they operate under industry bodies that can control them, but there are clear warning signs that indicate those to avoid.
There are rogue private lenders that set up flash websites offering to provide commercial finance for all types of lending, such as construction and development, land banking, specialised securities, bridging finance, and rural, residual stock, bridging and mezzanine finance.
In addition, they promote low interest rates to make their products appear more suitable, and higher LVRs than traditional lenders – suggesting that minimal financial information is needed.
If you then review their websites, they may mention multinational companies as being associated with them for funding lines. They tell brokers how quickly they can provide very fast turnaround for deals from $500,000 to $50m.
The warning signs on these websites are normally that they have no listed company history, no directors’ backgrounds or even legitimate testimonials from past broker groups that have used their services, and the phone number is usually a 1300 number.
These supposed lenders may provide a fast loan approval terms sheet requesting payment of a non-refundable upfront fee together with valuation and legal fees to keep moving the deal along. Some even give names of law firms and valuers they say they are associated with, again to look as though they have substance and credibility.
Once these fees are paid, that’s when the warning bells will start ringing. The deal will stop, with no communication, or they will reply with reasons why the transaction no longer fits their lending criteria.
The broker is left with the dilemma of their client being out of pocket by $10k plus in most instances, or with having to cover the cost themselves. They will have to start the deal again from scratch and try to place it elsewhere, provided the client has not lost confidence in them.
What action can be taken against these rogue private lending operators? The answer as of today is zero.
Once these fees are paid, that’s when the warning bells will start ringing. The deal will stop, with no communication
When I have spoken to brokers who have come across these types of operators, I have posed the question: how did they come to deal with them in the first place? The most common answer is that they heard about them from other brokers who were promoting that they had found the exact type of lender they had been searching for, and telling everyone of all the great features.
I must stress that most private lenders that have been around a long time are excellent and very reputable. They fully intend to support brokers’ clients wherever they can and, as expected, at a higher interest premium and with fewer terms and conditions than those of traditional lenders.
The market share of private lenders that provide funding through the broker network is reported to be over 10% of commercial lending as at today.
Until regulations come into play to stop these opportunistic operators, more will appear and in turn will give brokers caught by this activity a bad reputation!
My advice to all brokers is to take the following steps when dealing with private lenders for the first time: take time to question the background of the group; don’t just read their website for credentials and accept those as being correct.
Ask your aggregator if they know of the private lender, or talk to other experienced brokers in your network that have operated in the commercial market for some time.
Then ask the so-called lender for references from other mortgage brokers that have dealt with them in the past and verify their terms of operation as well as how they source their funding lines.
Who are the directors of the private lending institution and what are their backgrounds? Do they operate under their own AFSL licence? Make sure you are fully aware of the fees they will expect, such as upfront, ongoing loan costs, and valuation and legal fees. Also, are there any exit fees in the case of an early discharge or capital reduction during the term of the loan? Find out whether any of the upfront fees are refundable to the client if the deal does not proceed for whatever reason.
Does the lender undertake annual reviews of the facilities, or are they set-and-forget facilities for the term of the loan? What are the arrears rates should the loan facility default at any time?
As I said, most established private lenders are experienced and reputable, but it’s the rogue operators that can cause carnage, so being vigilant is key.
Glenn Mitchell
Head of commercial
and equipment finance,
YBR Group
