Non-banks ‘live or die’ on loan quality

Last month’s royal commission hearings saw executives from the big four banks and major brokerages Aussie Home Loans and Smartline grilled over lending practices. Customer expenses and broker remuneration were a key focus.

Former Pepper Group CEO Patrick Tuttle told Mortgage Business that it is “inevitable” the non-banks will be impacted by the outcomes of the royal commission.

“The inevitability stems from the fact that the non-banks have also adopted the same HEM and borrower expenditure measures currently being scrutinised by the royal commission,” Mr Tuttle said.

“The non-banks, even more so than the banks, are also highly dependent on the mortgage broking industry as their primary distribution channel; they don’t have the vast branch networks of the major banks or the same captive, vertically integrated aggregator businesses.”

The former Pepper boss is hopeful that regulators and the royal commission will take this into consideration before making any “rash decisions” around broker remuneration or the structure of the mortgage broking industry more generally.

“In the absence of a vibrant mortgage broker industry in Australia, with fair and transparent commission structures in place, competition across the Australian lending landscape will collapse,” Mr Tuttle said. “This is not being over-dramatic. It is a fact.

“As for the non-banks, they will be impacted by future macro-prudential controls and the royal commission’s recommendations — in a similar if not identical way to the banks — because they will be expected to apply equivalent responsible lending standards to their respective business models, albeit they are primarily regulated by ASIC rather than APRA.”

The non-bank sector has benefitted from APRA’s macro-prudential measures on ADIs, prompting some to question the quality of deals being submitted to Australia’s shadow banks.

Data from SQM Research released this week showed that funds under management (FUM) at Australian mortgage trusts grew by 92 per cent over the year to December 2017.

SQM Research managing director Louis Christopher told the AFR that while arrears remain low (less than 1 per cent), questions remain around the quality of loans.

“The question is whether the non-banks are picking up bad loans or good loans that the banks didn’t want because of the restriction,” Mr Christopher said.

However, non-bank veteran and Australian Mortgage Marketplace (AMM) chief operating officer Kym Dalton highlighted that non-ADIs have a major motivation to act responsibly.

“Non-deposit taking institutions (NDTIs) live or die based on the quality of their loans,” Mr Dalton said.

“Most NDTIs are relatively thinly capitalised compared to ADIs, with their financing efficiencies being dependent on the quality and performance of the loan assets in their pools of mortgages. Should they compromise responsible lending conduct standards, their continuance in business would also be compromised.”

Mr Dalton added that any parallels drawn to the shadow banking sector as it existed in the US pre-GFC are not relevant.

“Theirs was primarily an ‘originate to distribute’ model where the loans and their servicing were on-sold to other parties,” the AMM CEO said. “In Australia, NDTIs originating through brokers manage and service those loans for their life. They are vitally interested in the quality of the loans and their continued performance for the life of the loan.”

[Related: US players to ‘exploit’ gaps in Aussie mortgage market]