The Importance of Being Earnest (in Private Credit)

I have a funny story to share about an Association with few members. It comes after two established brokers called this week to praise Semper (and its new Director of Sales – Neil D’Souza) as being ‘trustworthy’ and ‘honest’. We appreciate the sentiments but, shouldn’t these be the fundamental tenets of all lenders and their officers?

Semper (in its former guise as ‘Commerce Credit’) has been around since before the National Consumer Credit Act and the GFC. We know there have always been ‘pretender-lenders’ in private lending land, offering ‘bait rates’ with ‘fee-fishing’ caveat traps, but what many may not know is that we once tried to initiate a process of industry-wide self-regulation.

It was 2005 when Semper and Interim Finance (great lenders and good friends), concerned with unscrupulous practices in private lending space, set up an Association under the Australian Finance Conference (“AFC”) announcing conditions for membership that others thought were so stringent we only secured four members. (Those four lenders are still thriving today). We performed good work: helping guide the establishment of the Consumer Credit Act and ASIC’s drafting of RG 69 to improve conditions for retail investors after the failure of investment managers Bridgecorp, Fincorp and ACR after the GFC. But the Association could not survive because it couldn’t grow its membership. Its principles were too high, and the bad practices continue today.

This is a cautionary tale because the Private Credit industry is growing very rapidly and, as it gains a larger share of former bank territory, it will come under increasing regulatory scrutiny.

The value of this story to readers today however, is the tenets of commitment we required of members then, which offer advice to applicants and brokers today when choosing a private lender in 2024:-

• Make sure the lender is really a lender and has funds under credit control. This may seem strange but beware, there are many pretenders;
• Check they have an AFSL if required to manage money and an ACL and AFCA membership if they provide consumer credit products;
• (The following applies to non-development loans): make sure an Offer Letter contains all the following items in addition to loans sum, and interest payment terms, or it isn’t a real Offer of finance:
  1. Borrowers’ and guarantors’ details including directors, trustees, those names on security titles and any other obligor;
  2. Trusts and Companies’ details;
  3. Property particulars including accurate value, prior sums and lot numbers and quoted max LVR for the Offer;
  4. An accurate interest offering and fixed fees (and unless the LVR or loan conditions change, these also should not change, unless negotiated by the applicant);
• An Offer should also be accompanied by a list of all the key proof materials required;
• Valuations should be independent (it is a common complaint that lenders manipulate value outcomes to change interest rates and fees at the last minute);
• Apart from a small admin fee to cover searches, costs should come out of establishment fees;
• Ask lenders what percentage of their loans go into default. How many property possessions they have had (in the interest of transparency Semper has had 4). If they have an AFSL this information may be publicly available;
• Ask about shareholding. Why not? They’re nearly all private companies. You wouldn’t want to borrow from a lending company owned by a liquidator would you?
• Expect monthly statements without having to ask;
• Expect appropriate and timely notifications of impending change.

Semper works with its borrowing clients. It expects to work with brokers to negotiate terms. Semper is patient and considerate with borrowers so long as they maintain communication and act honestly. We have never had to appoint a liquidator, preferring to work out difficult situations without incurring additional costs or hardship. We are perhaps old-school but, in over 20 years, we have had very few loans go more than one month in arrears and we enjoy 60% repeat business.

It’s the importance of being earnest.