5 myths about Non-banks
There are a lot of myths about non-bank lenders, almost all of them are untrue. We expose some common myths about this important part of Australia's home loan and finance system.
La Trobe Financial busts 5 myths about non-banks.
Currently the Australian financial services environment is being re-shaped. Major banks are undertaking a “simplification” strategy which has caused a constriction of credit availability, and a corresponding cautiousness amongst consumers.
Non-banks such as La Trobe Financial are more relevant today than ever, “stepping-in” to fill the void for customers that would ordinarily be taken up by the major banks. However frustratingly, some mainstream media sources continue to make ill-informed comments about non-banks being ‘unregulated shadow banks or subprime only lenders’ that are not factually accurate and imply that non-banks are recklessly lending, or could introduce material systemic risks to the Australian economy. Such comments are more than misleading and are just plain unhelpful to non-banks aims of building out credible competitive alternatives which the market, consumers, Treasury, and the Harris Productivity Commission are calling for.
Non-bank lenders have successfully operated in the Australian lending market for decades, as reliable service providers to their customers, and have helped to drive competition in Australia’s mortgage market to “keep the banks honest”.
Non-banks make up a growing part (around 7.4% - source: Housing Finance Australia September 2018, Australian Bureau of Statistics) of the $1.7 trillion Australian home loan market, lending literally billions of dollars annually of all the home loans written in Australia, estimated to be a total annual market volume of c$380 million in new residential home loans. This is, of course, a small fraction of the circa 20-25% market share that non-banks have traditionally held
Today we wish to debunk some common myths about this important segment of Australia’s home loan and finance system.
Myth #1: Non-bank lenders only give loans to people with an impaired credit history
Busted: Non-banks deal with a range of customers from bank prime to specialist (non-conforming) borrowers from all walks of life, including self-employed people, first time buyers and property investors. In fact over 25% of La Trobe Financial’s loans are made to what you would describe as bank prime customers – and they come to us for better service, and a quicker response.
Just because an applicant has been turned down for a loan by a bank (roughly 26% of the population) does not mean they present an unacceptable credit risk for a prudent lender. Some borrowers get knocked back simply because they don’t meet the technical criteria of the bank’s automated credit decisioning systems and are therefore placed in the “too hard basket”. For customers who fall outside the box, it is often not worthwhile for the bank to dedicate the required human resources to properly assess that customer’s financial position, objectives and requirements.
This is the service proposition offered by non-bank lenders: non-banks use more manual underwriting processes – requiring human involvement – to properly assess the credit worthiness of individual applicants. This ensures that credit is delivered to those in society who require it and who can afford it. As an example if you’re self-employed you might not have evidence of cash flow or PAYG statements which can mean your loan application gets rejected by bank lenders. There are all sorts of reasons a loan application can be rejected, but non-banks take all aspects of the borrower’s financial circumstances into consideration, rather than using blanket “one-size-fits-all” rules for all borrowers.
Myth #2: Non-bank loans are expensive
Busted: You can see some of the loans offered by non-bank lenders are advertised at rates which are competitive with bank lenders; non-banks wouldn't survive if they weren't competitive. In fact one non-bank only deals 100% in bank prime loans online.
It should be noted that competitive rates are achieved despite the additional costs associated with the more detailed and manual assessment of applications referred to in Myth #2 above. Multiple factors can impact upon what creates the interest rate borrowers get offered including market influences, the nature of the product and credit assessment requirements.
At La Trobe Financial, every home loan application is individually assessed based on its own merits, with the assessment carried out by a real person, not a computer. This ensures we can provide the right loan options for each borrower’s circumstances at interest rates that are competitive for that situation.
Myth #3: Non-bank lenders are not financially secure
Busted: The non-bank sector has undergone significant changes in the years following the global financial crisis. Many are now owned by large multinational asset managers, and the top five non-banks have substantial balance sheets and net assets. This reflects the fact that the major non-bank lenders are strong businesses, led by highly capable management teams, with long track records of operating successfully in the Australian mortgage market.
La Trobe Financial has been around since 1952, has over 320 staff, manages over $7 billion of Assets under Management and is 80% owned by Blackstone, the world’s largest Alternate Asset Manager with over US$472bn under management.
Myth #4: Non-bank lenders have less product options than the banks
Busted: Non-banks like La Trobe Financial often provide a wide range of finance options. They offer more flexible products than the banks and, because of their unique approach to lending, they tailor loans for borrowers who do not fit the lending criteria of the banks.
The important contribution that non-banks make to the diversity of loan products in the system will continue to grow as banks streamline and simplify their product sets post Hayne Royal Commission. Non-banks will continue to provide products and services to segments of the market which would otherwise be credit-constrained to the detriment of the Australian economy.
At La Trobe Financial we have the widest of loan choices from Prime to Near Prime and Specialist so our home and commercial loans are available for all sorts of borrowers, from those with full documentation prime to those working with alternative documentation/verification of their income. Our approach is to look at all aspects of a person's financial circumstances and credit requirements and our credit analysts are happy to facilitate someone finding the right loan for their situation.
We believe that a healthy loan market needs both the big banks and non-bank lenders working in competition; a wide range of lenders improves competitiveness, drives innovation and ultimately gives people more choices.
Myth #5: Non-bank lenders are unregulated shadow banks and unsafe
Busted: Non-bank lenders can, and should, be distinguished from un-regulated (not holding an ACL) debenture companies, many of which have exited the Australian lending market in the past decade.
We are regulated as to credit lending exactly as the banks are, and by the same regulator, ASIC, who has conduct over the credit laws nationally. Here are five reasons why this is a myth:
First - all credit providers in Australia, such as La Trobe Financial, and the other Non-bank lenders, and indeed the banks are all required to hold an Australian Credit Licence (ACL), and are equally regulated by the Australian Securities and Investments Commission (ASIC). ASIC therefore regulates all Non-bank lenders through the “responsible lending” legislation contained in the National Consumer Credit Protection Act 2009 (NCCP). Comments which suggest that Non-banks are “unregulated shadow banks” are ill conceived and factually incorrect. To suggest as a logical corollary a Non-bank may collapse solely because they aren’t regulated by APRA (rather than ASIC) is fanciful, and ignores the strident compliance processes within key players of the Non-bank sector – to restate our licences to operate as credit providers are at risk if we do not obey stringent responsible lending obligations.
Second - APRA the national banking regulator now has Reserve Powers (granted in early 2018) to step in and regulate Non-banks if 'systemic' risk issues arise. What’s more, banks are warehouse funders to Non-banks and they intimately know the quality of Non-bank loan books via monthly warehouse reporting submitted, and which APRA also sees. APRA can step in any time...it’s an epic fantasy to think they wouldn’t if required.
Third - each of the big Non-banks have significant owners who are reputation risk adverse and highly conscious of the current environment.
Fourth - Non-banks currently represent the only viable and established force for competition against the big banks in the market capable of picking up the annual residential loan funding gap of cA$75 billion created by the banks withdrawal. If Non-banks aren’t “in market” then credit availability would be tighter again
Fifth - if Non-bank loan underwriting quality was substandard then global investors, who invest in these loans for a living, would cease buying bonds issued by the Non-banks for funding. But in reality global investors have and are continuing to buy Australian Non-bank RMBS bonds because of the underwriting quality and performance characteristics of the underlying loans – no one could suggest these large global investors are irrational or ignorant. These investors continue to be strongly supportive.
In summary both banks and Non-banks function under the same national responsible lending laws, and credit licensing regime regulated by ASIC. The key Non-bank operators have significant capital on the table - meaning we are all in this for the long run. Non-banks are all conscious of APRA’s ‘Reserve Powers’, and we are all focused on continuing quality underwriting and disciplined growth of this sector. After 66 years of continuous operation through many economic cycles, La Trobe Financial as the longest operating Non-bank in the country is acutely aware of the significance of its role in providing a credible alternative for consumers in the credit markets at this time.
We are regulated by the ASIC as are the banks for the Credit Code standards applying to lending residential credit, and to assert otherwise is a falsehood.
About La Trobe Financial
With A$9 billion of Assets Under Management (AUM), La Trobe Financial is Australia’s premium non-bank specialising in credit and wealth management. La Trobe Financial provide funding and investment solutions to a diverse range of 150,000 customers and have done so since 1952. 80% owned by Blackstone, the world’s largest alternative asset manager, with over US$545 billion of AUM worldwide. We are a proven and trusted investment partner for institutional and retail investors alike, operating Australia largest retail Credit Fund ($4bn AUM and 40,000 retail investors). We have over 66 years’ experience, managing investment mandates in excess of $22.76 billion since commencement.
La Trobe Financial has been a leading innovator in the non-bank sector for many years including, pioneering “Lite Doc®” lending in Australia in 1990, creating the first private Reverse Mortgage (Seniors Loan™) in 2003, launching the first hybrid wealth management-loan product P2C® (Parent-to-Child) to assist first home buyers in 2013, introducing a unique to market Aged Care finance solution in 2015, and being one of the first lenders to introduce a fully digital KYC and AML checking of borrower applicants for brokers in 2017.
La Trobe Financial Services Pty Ltd ACN 006 479 527 Australian Credit Licence 392385. La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence 222213 Australian Credit Licence 222213 is the issuer and manager of the La Trobe Australian Credit Fund ARSN 088 178 321. It is important for you to consider the Product Disclosure Statement for the Credit Fund in deciding whether to invest, or to continue to invest, in the Credit Fund. You can read the PDS on our website www.latrobefinancial.com, or ask for a copy by phoning us on 13 80 10.
This publication does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and a general overview on matters of interest and it is not intended to be comprehensive. You should seek your own financial or other professional advice before acting or relying on any of the content. Copyright 2019 La Trobe Financial Services Pty Ltd ACN 006 479 527. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial.