A Loan we didn’t do…….

In this EDM we talk about the following touch points:

• Caveats versus mortgages
• Loans to businesses to buy out shareholders
• ASIC Whitewash process
• Lending against personal place of residence
• A loan to a person but for their business
• Duty of care

Sometimes we have to help brokers navigate the minefield of private lending. And this call was so interesting we thought we would share it with you.

The broker asked, “Do you do caveat loans.” 

To a credit head this is a loaded question. It says one or all, of the following – ‘there’s a first mortgage’, ‘I need money quickly’, ‘I think this will be a lower doc process’, ‘I don’t want the first mortgagee to know’.

So, we asked ‘why a caveat?’. and the reply was, “Speed”. And we learned that the loan sum was $1 million.

Our next question was about property location. It was Victoria. So, it was explained that, as we can compel issuance of Titles in Victoria, there is no difference between a caveat or registered mortgage in terms of the time it takes to make settlement via PEXA. In both cases the primary lender would learn of the security taken and we would need to check the sum of the first mortgage either way.

Then we asked what the funds were to be used for? And the response was, “To buy out a business partner”.

Ahhh, now we have an issue that will defy the motivation for speed. So, we explain that any company raising debt for the purpose of buying out a shareholder would be required to go through ASICs whitewash process, a compliance procedure that allows a company to provide financial assistance to a person or entity purchasing shares in the company. The process is required under Section 260A of the Corporations Act 2001 and without going into too many details, ASIC’s concern is where companies raise debt to ‘pay out or partially pay out a shareholder’ when the process incurs registration of a senior debt by PPSR Registration, which subsequently disadvantages any existing creditors. It sounds longwinded but no lawyer worth their salt is going to allow a lender to provide funds to a company to pay out a shareholder without going through this process. And it takes up to two weeks.

“But the borrower wants to borrow the funds personally.”

We ask who is on title of the property and learn that it is the intended borrower, in their own right. So, we advise that this would be a consumer loan, which we do not provide.

“But the loan is for business purposes!”

Then, we advise, we should lend to the company with the owner of the property as a Director Guarantor. But then the whitewash process applies.

“But it is a person using the funds for their business.”

At this point we were going round in circles. Even if we could or would lend to an individual, with the loan in their name, against their personal place of residence (which we wouldn’t), we fail to see how we could justify it as a business loan and if we could (again, we couldn’t without lending to the business in its own right), then we would need to go through the whitewash process.

At the end of the conversation the LVR request was too high anyway, but we suggested the shareholder negotiate a lower buy-out cost, or a two stage buy-out with shares held in escrow pending a final payment. But it was all too much.

We appreciate the need for speed. We can be as speedy! It takes only so long to compete as documents take to sign and lodge.

This broker may well find a lender with less experience and end up placing the loan in a way that puts both lender and borrower in jeopardy. And this is not fulfilling a duty of care to either.