03.Non banks to blame?
Banks have the lion’s share of the home-loan market, but the Australian Bankers’ Association claims that between 65% and 80% of mortgage repossession applications to the courts are by non-banks. One in two people calling the Consumer Credit Legal Centre in NSW concerning mortgage problems had borrowed from non-banks.
So who are these lenders? Well, it’s hard to know. A 2007 report by the ACT Consumer Law Centre analysed the lenders that took repossession actions in ACT between 2002 and 2006 and found that companies such as Perpetual Trustees and Permanent Custodians, which often act as the trustee companies for mortgage investment funds, topped the list. But the names of the lenders that consumers borrowed from aren’t disclosed.
A 2007 list for NSW reveals that less well-known non-bank lenders such as Circuit Finance and Lawteal Seconds also appear regularly in the repossession cases. Of course, mainstream bank lenders feature prominently too, but non-banks are over-represented, given their relatively small share of the market. 75% of complaints received by the Credit Ombudsman are about non-members — lenders don’t have to join this scheme if they don’t want to.
Of the four companies named above, only Perpetual Trustees is a member of the industry group, the Mortgage and Finance Association of Australia (MFAA).
Perpetual acts as a custodian and trustee for mortgage trusts and other mortgage investments, so it appears on the repossession lists. “Perpetual is the trustee for the majority of securitised lending in Australia,” a spokesperson said. “As trustee, our role is to secure assets and hold these in trust on behalf of capital markets investors who provide the funds for these loans. As such, our name appears on the associated loan documents as the lender of record.”
Similarly, Permanent Custodians doesn’t lend to consumers, but acts as the trustee for loans that banks and non-bank lenders arrange. When these loans go into default, Permanent Custodians' name, rather than the lender, appears in court repossession actions.
Types of non-bank lenders
The MFAA, which mainly represents mortgage brokers and non-bank lenders, points out non-bank lenders shouldn’t be tarred with one brush. It says there are three types of non-bank lenders:
- Lenders of prime (standard) loans whose default rate is little different to banks’ standard loans. “These non bank lenders are not involved in repossession actions any more than bank lenders,” the MFAA says. “The default rate for prime loans is about 0.4%.”
- ‘Non-conforming’ lenders (which offer ‘low-documentation' loans, known as ‘sub prime’ in the US). They lend to riskier customers and, according to the MFAA, this means they’re likely to have a higher default rate, of about 5%. "Therefore these lenders are more likely to have a higher representation amongst repossession actions."
- Predatory lenders The MFAA says there are fringe lenders who prey on vulnerable borrowers. They’re also known as predatory lenders. “Because their business model anticipates a fairly quick default by borrowers who should never have been lent money in the first place, a considerable proportion of their loans finish up in repossession actions,” the MFAA says.
In 2007, consumer groups joined with industry groups including Abacus (which represents building societies and credit unions), the Australian Bankers’ Association and MFAA, to form a coalition to tackle the problems of predatory lending.