What's Up, Doc?

By David Holmes
on Monday, June 25, 2012
Low doc loans

Recent negative headlines around low doc loan practices are certainly causing Australians to sit up and take notice.

Low doc loans exist to service a significant demographic across Australia – namely, small business owners and the self-employed. There is ever-increasing demand for this type of lending but the stigma of low doc loans still abounds and I feel more needs to be done to educate the public on the evolution of low doc loans and the security offered to this type of borrower.

The GFC undoubtedly played a major role in the drop-off of low doc loans from 2007-2010. However, they emerged from these difficult economic times as a completely new, and enhanced form of lending; the Alternative Income Verification Loan (Alt Doc).

The evolution of low doc…

The National Consumer Credit Protection Act (NCCP), which was passed in July 2010, clearly lays out the requirements for all credit providers in relation to how they can deal with a consumer – meaning there’s now a greater level of protection in place.

The Act was the result of comprehensive discussion and negotiation between state and federal governments over several years, culminating in the bringing together of all the different states and territories into one nationally consistent framework to legislate the way in which credit is regulated.

The primary benefit for borrowers is that the NCCP makes things simpler for all Australians to know their rights and what they can expect when arranging any form of credit. It also means a lender cannot lend to a customer unless they have complied with the responsible lending provisions, meaning a loan has to pass a ‘not suitable’ test, designed to eliminate shonky lending practices of some lenders who historically provided unsuitable levels of credit to borrowers who were not in a clear position to manage repayments.

Verification needed…

Under the NCCP requirements, brokers and lenders have to evidence the borrower’s ability to repay their loan without undue hardship. This makes low doc loans, in their revised alt doc incarnation, look very much like standard full documentation loans; the only difference is the documentation used to satisfy the requirement to evidence a client’s income.

In the case of a self-employed borrower, the traditional two years’ tax returns can be submitted, but so too can BAS and business banking statements, and a letter from the borrower’s accountant. Indeed, in many cases, alternative options to the traditional tax returns are more reflective of the current state of a business, as they provide more up to date evidence; often tax returns accepted by banks are 18 months old and do not show the current financial health of a self-employed borrower.

In safe hands…

The new Alternative Income Verification Loans are an integral part of the mortgage product offering in Australia and allow mortgage brokers to help more clients purchase their dream home, borrow funds to improve their homes or invest in business growth.

As a champion of responsible lending, Pepper is committed to spending the time to work with our brokers on the value of Alternative Income Verification Loans. Providing this transparency around what is appropriate alternative income verification equips brokers with the correct information to place a low doc loan application with the right lender each time.

Self-employed and small business owners are the backbone of the Australian economy. Clarifying the requirements of a low doc loan, and removing the stigma and uncertainty around the integrity of these loans, will help ensure these individuals can continue to access essential funding, with confidence we are now on much safer ground than before.

David Holmes

About David Holmes

Appointed in August 2000 as Pepper’s Chief Operating Officer, David Holmes brings a wealth of experience in the non-conforming home loan market to Australia. David is responsible for the strategy, development, implementation and ongoing monitoring of Pepper’s credit policy and procedures. He oversees all of Pepper’s servicing operations teams; this includes Underwriting, Business Processing, Customer Service, Collections, Settlements and Compliance and is ultimately responsible for all aspects of Pepper’s lending criteria and end-to-end operations processes.

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