2nd July 2008

Dear Investor,

Risks in Private Lending and how La Trobe manages them

Arranged properly, private lending is an investment choice for investors seeking a higher monthly income from an investment in mortgages. However, as with any form of investment, there are risks that need to be understood.

In this newsletter we concentrate on three key areas of credit acceptance, how they relate to investor risk and how La Trobe manages these risks.

The three (3) key 'Cs' of credit are:

  • Character;
  • Capacity; and
  • Collateral.

'Character'

In assessing an application for mortgage finance, La Trobe looks to the character of the borrower to verify that the borrower is likely to service the loan and then repay it on maturity. The risk in this area of credit acceptance is that the borrower does not have the appropriate 'character' to support a decision to grant the borrower credit.

The character of a borrower can be ascertained by looking at their credit history, residential stability, employment history and asset accumulation.

La Trobe's Policy

La Trobe's Application for Mortgage Finance requires the borrowers and guarantors to complete a declaration as to whether they:

  • have been declared bankrupt, insolvent or entered into an arrangement for the benefit of creditors;
  • have been refused credit in respect of the current application previously;
  • have had any court judgements entered against them or if they have defaulted on any loans; and
  • have been (or are) a shareholder or officer of a company where a manager, receiver or liquidator has been appointed or whether any court actions against the company had been taken.

In addition to this declaration, La Trobe further investigates the 'credit worthiness' and 'character' of borrowers by conducting a credit check and obtaining an independent credit report through a credit reporting agency. This credit report can provide up to five (5) years' history of credit enquiries made by the borrower including any defaults, court actions or bankruptcy actions taken against the borrower.

La Trobe's Application for Mortgage Finance also requires the borrower to provide details of their:

  • Type and length of employment;
  • Current residential address and length of residency; and
  • Current assets & liabilities.

La Trobe is conscious that credit fraud or deceptive conduct may occur and has embraced the requirements of the Federal Government's Anti-Money Laundering legislation and 'Know Your Customer' requirements for customer identification. All mortgage documents for new loans are prepared by La Trobe's panel of independent solicitors who also undertake all necessary property searches and carry an appropriate level of fidelity and professional indemnity insurance.

'Capacity'

The borrower must have the 'capacity' to service the loan throughout its term, and this means making the required interest payments on time and in full. The risk here is that the borrower cannot service the loan, and that the borrower will fall into arrears during the term of the loan.

La Trobe's Policy

To manage this risk, we check the capacity of a borrower to service the loan by looking at their income, length of employment and servicing ability.

We always assess the capacity of the borrower to service the loan commitments. Depending on the individual circumstances - whether the borrower is self employed, PAYG or a company, we ask the borrower to provide a repayment certification and a letter from the borrower's accountant confirming the borrower's repayment ability or a letter or pay slips from their employer. These details are then assessed using La Trobe's Net Disposable Income ('NDI') calculator. ABN and White Pages searches and telephone interviews are also conducted on all employers and accountants to ascertain their legitimacy.

If a borrower defaults on their repayments, we implement a strict recovery procedure. As soon as a payment is not made, the borrower is contacted and payment is sought. Should the payment not be brought up to date, or a suitable arrangement entered into, the procedure to take possession and sell the property will commence.

'Collateral'

The ultimate protection for investors in a private loan is the registered mortgage over the security property.

The 'collateral' offered by the borrower can be ascertained by looking at the security property to be taken and if any guarantees are required. The cornerstone to prudent private lending is the establishment of the value of the property and then setting the appropriate loan to valuation ratio ('LVR').

La Trobe's Policy

La Trobe only obtains valuations from registered valuers who are on La Trobe's panel of approved valuers and who have the appropriate Professional Indemnity Insurance cover. A valuation report must be provided for all non residential securities and the majority of residential securities. In certain circumstances where the security is residential or rural-residential and the amount of the loan is 40% or less than the value disclosed in the most recent Municipal Rate notice of the land and any improvements, a valuation report may not be sought.

The LVR applied depends on the type of security property being taken. The LVR will not exceed 80% unless the loan is for a Special Situation mortgage. Special use properties and rural properties have a reduced LVR reflecting the type of security.

As part of La Trobe's lending practice and administration policy, we ensure that all security properties with improvements have the appropriate level of property and fire insurance.

Where a loan is provided to a company borrower or where the borrowers and mortgagors differ, La Trobe obtains guarantees from the appropriate parties.

Conclusion

As with all types of investments, there are associated risks, and recognising those risks and managing them appropriately is the key to successful investing.
At La Trobe, we consider that we have a range of risk management strategies that ensure that the risks of private lending are kept to a minimum.


Best regards,
Chris Andrews

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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.










La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer



* La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. You can get a copy of the PDS by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.
(1) The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Past performance is no guarantee of future performance. Investors risk losing some or all of their principal investment.
(2) Withdrawal rights are subject to liquidity and may be delayed or suspended.
(3) As at 30/11/10 the La Trobe Australian Mortgage Fund had received a Morningstar RatingTM of 5 stars. The Morningstar Rating is an assessment of a fund's past performance - based on both return and risk - which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision. © 2010 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the above data or content to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement, before making any decision. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/fsg.pdf
(4) 3.75 star rating out of a possible 5 star rating indicates that Adviser Edge believes that La Trobe has performed in line with its peers and exceeded its peers on some fronts.
(5) The Standard and Poors rating of 4 out of 5 stars indicates that S + P has high conviction that La Trobe Financial will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers.
(6) The award was given to the La Trobe Australian Mortgage Fund, Pooled Mortgages Option.
Research Ratings are subject to change. To view the latest research information please visit www.adviseredge.com.au or www.standardandpoors.com.au. Ratings issued by Adviser Edge Investment Research AFS Licence No. 236783 and Standard & Poors Information Services (Australia) Pty Ltd AFS Licence No. 258896 are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. The ratings are only one factor to be taken into account in deciding to invest. Research Houses receive a fee from La Trobe for rating the product. The Adviser Edge rating is generally a measure of the rated entity's capacity to meet its repayment obligations in all market circumstances.
IMPORTANT: This message, together with the La Trobe Financial website (www.latrobefinancial.com.au) and all its contents have been prepared for general information only and should not be taken as legal or financial advice, and as such the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before acting on any information present on this message or the La Trobe website.