Loan scenario: The borrower had been a customer of the lender for more than 20 years, with a AAA repayment record. The borrower owned and operated seven independent retail businesses – one as a sole trader, five trading under a company entity and another in partnership with two other parties.
Business activities were deemed as “discretionary dollar spending” and since the GFC, turnover and profit on all shops has reduced significantly. The borrower sought a loan of $230,000 to demolish and rebuild residential property destroyed in the Brisbane flood of 2011. While the property was insured, coverage did not include water damage from flooding.
Challenges: This transaction was challenging on many fronts:
1. A valuation of the land and proposed improvements to the dwelling was $200,000 less than the last valuation completed some two years earlier prior to the flood.
2. Equity position based on new valuation identified a debt to equity position (LVR) with the lender of 112%.
3. Servicing numbers were “tight” based on the declining trading figures since the GFC. These issues needed to be addressed closely under “responsible lending” guidelines, and ability to meet any new and current commitment in the future.
Getting it over the line: We applied “relationship, character and behavioural” principles to our submission and recommended to the bank that it was in both their interest as well as the borrower that this transaction be considered in a favourable light.
As further collateral, we offered a “family pledge” to top up equity, using the borrower’s de facto spouse’s property. Proposal then provided an overall debt to equity of 80%. The bank initially informed us that our proposal was well outside the specification of the family pledge product profile. We were eventually able to convince the lender that a “common sense” approach should be adopted in this instance, for the benefit of all concerned.
The loan was eventually approved by the bank’s credit committee as originally submitted.
Lessons learned: In this transaction, it was very much a case of patience is a virtue. We dealt with numerous assessors and credit managers throughout a protracted approval process.
Considerable time and effort was spent working through financial data and with the lender’s personnel to fully understand the current situation and potential longer term risk implication should the proposal be declined. We never stopped believing.
