How brokers can rescue clients from the jaws of dodgy predatory lenders

They’re every broker’s worst nightmare, especially when their primary goal is to achieve the best outcome for a client.

Unfortunately, despite the abundant amount of financial regulations here in Australia, predatory lending is still a massive problem.

The Australian Securities & Investments Commission in early 2024 announced a complete crackdown on predatory lending, especially where small businesses were the victims.

We’ve heard the horror stories plastered across the news, such as the small-business owner who ended up with $100,000 more debt after being slammed with unexpected fees.

As a private lender with a front-row seat to these cautionary tales, I’ve seen it all.

The non-bank commercial real estate debt market was valued at $74 billion at the end of 2023 and it’s expected to double in the next five years.

This growth has come at a cost to clients and their brokers.

There is a prevalence of non-bank lenders that promise the world – instant approvals, no-doc loans, and “guaranteed” outcomes – but deliver nightmares that good clients struggle to break free from.

But fear not. While the predatory lending dungeon may seem inescapable, armed with the right knowledge (and a few good backup options), you can be the hero your clients need.

A real broker’s horror story: Lender takes $20k upfront fee and runs

This is one of my real-life clients.

“James” (name changed for privacy), a property developer, sought to purchase a site in eastern Melbourne for a six-lot subdivision.

However, post-pandemic, lending restrictions had tightened and major banks were unwilling to fund James’ project. One lender offered a mere 40 per cent LVR, while another refused development loans entirely.

Frustrated, James turned to a private lender his broker identified as legitimate, but unusual.

The lender proposed a 70 per cent LVR, 7.85 per cent interest, a 24-month term, and a whopping upfront $20,000 fee – terms that raised red flags.

Despite his broker’s concerns, James, under pressure, decided to proceed.

The client paid the exorbitant $20,000 upfront fee and the broker worked his tail off towards settlement.

But the morning of settlement, the lender vanished off the face of the earth. They were uncontactable. Nowhere to be seen.

James was without funds. And he couldn’t complete the purchase.

Facing a binding contract and the threat of legal action, James panicked.

(The broker reached out to me and we got the deal over the line, but this is an example of a horror story that happens way too often).

How to spot the 3 key private lender red flags (so you’ll never ever be fooled)

Dodgy lenders are difficult to spot, but they do leave clues.

Here’s how to identify the biggest red flags:

Deals that sound too good to be true

A client walks in, ecstatic about a lender promising an 80 per cent loan-to-value ratio (LVR) for a commercial property. They boast of no credit checks and guaranteed settlement within 24 hours.

This kind of deal is a ticking time bomb.

While an 80 per cent LVR might occasionally be realistic for residential loans in private lending, it’s almost unheard of in the commercial space without serious strings attached.

These promises often mask sky-high interest rates or hidden fees that will bleed your clients dry.

The average LVR is around 60–75 per cent for commercial properties. That’s what you’ll usually get from a reputable lender.

Unrealistic settlement timelines

A lender actively advertising a settlement in 12–24 hours may sound like a dream come true to a client who needs an urgent deal done.

But if a lender publicly advertises something like this, you should immediately identify red flags.

Settlements within 24 hours are possible, depending on the nature of the deal (I myself have done them from time to time). But they certainly are not the norm.

Good private lenders can take up to five business days to settle a loan and they certainly won’t “guarantee” anything.

Let’s face it: good things take time. Proper due diligence, valuations, and the legal work simply can’t happen overnight.

Clients who fall for these traps often discover the fine print includes expedited processing fees or clauses that lock them into inflexible terms. Like this one story of a Melbourne business owner who thought he was getting a $500,000 loan from a non-bank lender, only to end up with $380,000 when they unexpectedly took all the interest upfront.

Bold promises without documentation

Some dodgy lenders, without asking any questions, will produce “pre-approval” letters without asking for any supporting documents.

If a lender does this, there’s a good chance you’re dealing with a predatory lender.

Legitimate lenders base their decisions on data, not sales pitches.

Many non-bank lenders will do a deal with low documentation (Archer Wealth only requests five relatively simple documents).

But no-doc loans for commercial property deals are rare and should be avoided.

How to save clients when they’ve been duped by a dodgy non-bank lender

Even with all the warning signs, some clients may find themselves in a deal that they cannot get out of.

Maybe it’s a lack of experience, a rush to meet a deadline, or sheer desperation.

Whatever the reason, when the deal goes sideways, you need to be their lifeline.

And here’s how you can be that lifeline.

Have key backup lenders on speed dial

When a dodgy lender pulls out at the eleventh hour (revealing their true colours), having reliable backup lenders can mean the difference between salvaging the deal and watching it crumble.

There are many private lenders out there that personally make it their mission to be the dependable plan B for brokers and their clients.

They specialise in stepping in during tight timelines and complex scenarios, without the predatory tactics.

Reassess the client’s financial situation (and become a quasi-therapist)

When a deal with a dodgy lender falls apart, emotions run high. Clients may feel embarrassed or betrayed. This is your chance to guide them back to solid ground.

Sit down, reassess their finances, and set realistic expectations for what they can borrow and from whom.

You should also check in with them and make sure they are okay. These kinds of scenarios can be quite traumatic for business owners, who see their entire livelihood (and its possible doom) flash before their eyes with lenders suddenly backing out last minute. I’m not exaggerating.

Educate clients for the future

Education is the best antidote to dodgy lending. Help your clients understand the importance of transparency in loan terms, realistic timelines, and the value of a lender that prioritises their long-term financial health over short-term gains.

Here are some of the red flags to look out for:

• Deals with a very high upfront fee and a very high LVR.
• Bizarrely low interest rates.
• An unusually quick pre-approval and release time.
• An overpriced valuation.
• Extremely high exit fees.

Building a network of reliable lenders can also mean your clients always have access to ethical and efficient funding solutions.

Dodgy lenders thrive in the shadows of desperation and misinformation. As mortgage brokers, you have the power to guide clients toward the right direction.

If you can spot the red flags, provide a safety net when things go wrong, and partner with trustworthy private lenders, you can help clients escape the “predatory dungeon” and set them on a path to financial security.

Remember: The only thing scarier than a predatory lender is the regret of falling for one.

Gee Taggar is the managing director of Archer Wealth.