The Hidden Risks of failing to identify coded loans

The Hidden Risks to Lenders and their Brokers failing to identify coded loans

In Australia’s commercial finance landscape, lenders navigate complex regulatory requirements to ensure borrower protection. The National Consumer Credit Protection Act 2009 (NCCP Act, the Code or NCC) is designed to safeguard consumers from predatory lending. However, some lenders are sidestepping these regulations, and brokers remain under-informed, thereby exposing themselves and borrowers to significant risks.

Avoiding the Code

The NCC governs consumer credit transactions, but some commercial lenders attempt to bypass these regulations by:

  • Using ‘same-day’ Special Purpose Vehicles (SPVs (Pty Ltd entities)) as borrowers, masking true borrower identities.
  • Structuring loans as ‘commercial’ to evade consumer protection provisions.
  • Paying out mortgages made up of predominantly consumer home loans and topping up with a small amount of commercial-use finance.

 

These evasion tactics may be lucrative for lender-abusers of the Code, but they can cause untold financial difficulties for borrowers and jeopardise the practices of responsible lenders in the broader market.

Failing to Check Serviceability and/or Capacity to Exit

One of the benefits of private capital is the high level of payment flexibilities offered to borrowers such as:

  • Partial interest payment for term,
  • Deferred interest payment for term.
  • Pre-paid interest for term; or
  • Part prepaid interest followed by regular interest payment during the term.

 

Many private credit loans are exit-centric, meaning repayment is to come from a provable future event such as sale of a property.  But lenders often take a soft approach to assessing serviceability or repayment capacity. A loan that is prepaid for term and requires no monthly interest payments and is to exit by way of refinance, for example, should require the lender to assess the borrower’s capacity to achieve such refinance at the end of term. This is very often overlooked and may expose the lender to increased default risk and put borrowers at risk of financial hardship.

The Author of this article contributed guidelines to ASIC as an industry advisor during the NCCP1 and 2 processes which led to a nationwide adoption of the NCC. These describe appropriate responsible lending practices for consumer and commercial bridging finance. Applying these principles Semper has had only five loans requiring recovery support in almost 20 years of operation.

Looking forward

The Australian Securities and Investments Commission (ASIC) has intervened in numerous cases where lenders disregarded borrowers’ repayment capacity. One case is receiving considerable attention in the press. Other lenders, and their broker / introducers should be warned. With a rapid increase in private credit providers, ASIC is bound to act soon and bring regulations to an unregulated market. When the CEO of one of the largest private credit companies in Australia expresses a comment that private deals between lenders and borrowers should be allowed to be kept private, he misses the point that his fund is filled with retail investors, and it is ASIC’s duty to ensure they have full transparency of risk.

Now is the time to follow best practice and embrace Regulatory reform to improve this burgeoning market.

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Commercial lending

Semper is a leading non-bank lender specialising in property-secured loans to businesses in any industry with loan sums from $250K – $30M 1st and 2nd mortgages Australia-wide up to a maximum LVR of 80%.

Semper offers a wide range of flexible products tailored specifically for you. We specialise in all your short-term and bridging finance needs.

We don’t do loans the banks won’t, but assist when the banks can’t, usually due to timing or circumstance.

COMMON LOAN USES

Rapid property acquisition pending alternate finance;
Managing cash-flow challenges, such as:

  • Tax liabilities and ATO debt
  • Replacement finance or deleverage from an existing lender
  • Pre-insolvency issues/ release from administration and turnaround
  • Creditor payments
  • Release of equity
  • Debt refinancing
  • Seasonal trends
  • Business emergencies
  • Bridging the gap between sale and purchase (residential or commercial)
  • Rapid drawdown and equity release
  • Buying a business
  • Meeting the capital needs of a growing business
 
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