As regulation of banks has become more stringent over the decades it is only natural that a wide range of private lenders have emerged. These range from quasi-institutional lenders that increasingly fund construction for developers to lenders that specialise in credit-impaired borrowers to private funds that will lend to borrowers who can’t qualify for other loans.
Overall, I believe that the emergence of a diverse range of lenders is a positive for borrowers and the economy generally. However, there are a range of issues that borrowers need to be aware of when they approach non-bank lenders.
Less Regulated
Banks are subject to the Banking Code of Conduct – which seeks to impose on banks a set of safeguards and protections above and beyond what the relevant laws provide.
Non-bank lenders that undertake consumer lending are subject to the National Consumer Credit Code. This imposes a series of requirements on lenders including licensing, independent dispute resolution mechanisms, disclosure and a range of other consumer protections.
However, developers and property investors borrowing for commercial purposes from non-bank lenders have much less protection.
In this article, we will explore some of the issues that our clients have faced in the past months. We’ll conclude with some key tips when using non-bank lenders.
Fees and Charges
When the Banking Code of Conduct and the National Consumer Credit Code don’t apply – lenders have much more freedom to set their interest rates and other fees.
I may be showing my age – but you may remember the Aussie Home Loans marketing campaign “Fee, Fee, Fee I am the Giant Bank!” Sadly, the non-bank lenders are much better at this than the banks ever were.
Unlike banks, private lenders often have substantial application fees (however described) and ongoing loan management fees in addition to the quoted interest rates.
Sham Lenders
A specific sort of private lenders seem to specialise in offering loans on unusually generous terms to induce the payment of large approval fees in advance.
Once the approval fee is paid there is a never-ending list of excuses why the loan is delayed or can’t be settled.
This is facilitated by letters of offer that impose large fees that are payable even if the loan doesn’t proceed. Mortgage documents reserve the right to the lender not to proceed with the loan for any reason at any time. It isn’t unheard of for lenders to decide they won’t proceed and still claim loan establishment fees….
Rollovers and Extensions
Most private loans are essentially short-term and don’t typically afford you the right to extend the loan term.
If your project is delayed or you aren’t in a position to repay the loan on the due date you will be in the difficult position of effectively begging for an extension. Some lenders will maximise the value of the default and other fees that they charge in these circumstances.
Refinancing a half built project is generally not a realistic option.
Enforcement
In recent times, I have seen a number of private lenders resort to fairly aggressive enforcement actions relatively soon after a default occurs. This might include taking possession of development sites or instituting legal proceedings.
There is a suggestion that law firms that act for private lenders are prepared to act on a contingency fee basis. That means that they don’t charge ongoing fees – but get paid their fees when the loan is repaid / property is sold.
This works against the interests of the borrower in a number of ways:
- The lender will be less sensitive to the quantum of legal fees and hence fees are likely, all things being equal, to be higher;
- The lender is likely to be more aggressive – as they don’t have to worry about paying fees as they go and the lawyers want to get paid sooner rather than later; and
- The lender probably has less reason to negotiate a result that allows the borrower time to refinance and/or sell the property.
Certainly, in my experience, from a borrower’s perspective, there is nothing quite so difficult to deal with as a mortgagee who thinks there is plenty of equity in the property to cover their default interest rates and legal fees.
Key Tips
Some key tips that will help you to navigate the world of private lending more safely:
- Finance Brokers – a good finance broker can steer you towards more reputable private lenders and a lender that better suits your circumstances.
- Rollovers and Extensions – try to ensure that you have enough time to complete your project / refinance or negotiate the right to extend the loan.
- Review the Paperwork – loan documents can be long and intimidating. Resist the urge to sign on the dotted line as you are under pressure. Get some advice.
- Be Proactive – if things start to go wrong – act decisively and early. My experience with borrowers in trouble is that those who recognise their problem early and take steps to address it generally have better results.
At Lewis O’Brien & Associates we can provide a range of services that may assist. These range from providing solicitor’s certificates to general advice in relation to mortgages. However, we are not finance brokers and can’t recommend specific lenders.
Perhaps the greatest service we can provide is to be a sounding board. You can access Lewis’ 30 years of experience by booking time with him here. There is a low fixed fee and no further obligation.
Lewis O’Brien
Your Preferred Property Lawyer