Neo Lenders will lead the way and use new technology across the life cycle of a mortgage to provide home loans that comply with responsible lending while also providing a superior service, writes Graham Andersen chief executive of Australian Mortgage Marketplace.
Australia’s non-bank lenders have been an important part of the Australian prime mortgage markets for nearly 30 years even though their market share declined after the financial crisis.
Recent events certainly point to that role growing again as we move from a major bank dominated market to one with a more diversified number and spread of market share among both bank and non-bank mortgage providers.
As Neo Lenders and Challenger Banks emerge, technology will play a key role in the market developing more diversification.
Responsible lending is now in sharp focus by the regulators, the royal commission and the banks themselves as many circumstances unfold where perhaps loans were made to borrowers that should not have been.
A borrower’s ability to service a loan and their understanding of loan terms have arisen as major concerns of a portion of loans on major bank balance sheets.
These banks are being forced to improve their processes, requirements and systems to meet proper responsible lending guidelines with the prospect of harsh restrictions being recommended by the current Royal Commission.
Steady erosion of lending standards
Wayne Byres, Chairman of APRA, on 28 March 2018 to the Senate Standing Committee on Economics
“…. we observed that the type of competition that was occurring was clearly unhealthy: the steady erosion of lending standards in the face of strong competitive pressures to generate volume and grow market share. As a result, we have taken a range of measures to moderate the volume of new lending with higher risk characteristics while stronger lending standards are being reintroduced, backed by higher capital requirements for higher risk portfolios.”
APRA’s current actions are entirely appropriate for protecting household deposits in the banks. Our major banks with most of those deposits, also enjoy the benefits of being too big to fail and the implied government guarantee that goes with that status.
So, to protect Australia’s taxpayers they should be held to very high lending standards beyond what those without taxpayer support should be held.
The irony of this situation is that non-bank lenders providing prime mortgage lending have led the way with responsible lending since the 1990s.
Businesses like RAMS, AMS, Challenger and Resimac dominated wholesale funding in capital markets from the 90s until the financial crisis.
Like the non-banks of the 1990s, the emerging Neo Lenders are independent organisations that work very differently to banks. Firstly, and obviously they do not take retail or wholesale deposits, are not part of the banking system and do not fund assets by borrowing on a highly leveraged balance sheet.
As such, they are not regulated by APRA, nor do they create money through mortgage lending.
Neo Lenders are regulated by ASIC and are subject to scrutiny of loan origination practices by warehouse banks and, credit rating agencies and capital market investors when mortgage backed securities are issued into the markets.
There is no presumption of compliance with responsible lending requirements, the parties that are taking the risk provide continual assessment of non-banks and Neo Lenders for compliance to mitigate the risk of any breach that could have disastrous consequences to repayment.
That said, some APRA regulations might apply at times to Neo Lenders but the extent of such regulation, or the necessity for, it is still unclear.
Neo Lenders fund in wholesale markets and their market share poses no system risk nor does the way they operate.
First to market
Neo Lenders must be highly transparent and compliant on lending standards to be able to fund in the wholesale markets, in stark contrast to the poor disclosure requirements of the major banks even as APRA notes that there was the “steady erosion of lending standards”.
The future, it would appear, is one with an added focus on responsible lending.
Technology is now available and in development that can both improve services to borrowers and brokers in the mortgage process and ensure compliance with strict responsible lending requirements.
If history is any guide, the Neo Lenders will adopt this technology first and as such become highly important in the operation of the mortgage market.
Technology has been developed where a borrower’s monthly expenses and commitments can be confirmed and identified through multiple accounts with multiple lenders.
Through open banking data a borrower’s good payment history can be confirmed. All done real-time as an application is completed online.
Online borrower education and knowledge programs can greatly lessen the chance of a borrower choosing a loan that’s unsuitable or a borrower not understanding the loan terms.
Credit assessment of the borrower, loan terms and collateral property is automated to give a borrower approval and a loan rate to deliver a fast to yes service.
The human underwriter can confirm approval with reliable serviceability data, income confirmation and property value all supplied online so that strict responsible lending guidelines are met with certainty.
Once the loan is settled all data relating to the borrower, the loan and the property can be made available in a trusted digital form.
Analytics overlays the data to provide third parties with an easy and reliable ability to understand their risk and value their asset.
While banks, especially major banks, have been very active in introducing technology to make the interface with the borrower in banking, history tells us that they are more followers when it comes to technology for the management of loans and capital markets funding techniques.
Originally published 3/4/2018.