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Trust is the foundation upon which deals are built.
Brokers rely on lenders to deliver what they promise, while clients entrust brokers to guide them through key significant financial decisions. Sometimes, the most important decisions of their lives.
But a disturbing trend is emerging that threatens this foundation: “ghost lending”.
This unsettling phenomenon is a growing threat in today’s lending market – characterised by unscrupulous lenders that exploit the vulnerability of borrowers and brokers alike.
These ghost lenders offer seemingly perfect loan solutions – low rates, quick settlements, or high loan-to-value ratios – only to vanish at the most critical moment: settlement.
The aftermath is devastating.
Welcome to the terrifying era of ghost lending – lenders that vanish just before settlement
Ghost lending refers to the prevalence of predatory lenders that promise loans on terms that are often ‘too good to be true,’ only to disappear at (or shortly before) settlement.
These ghost lenders leave borrowers without their promised funds and their brokers scrambling to find solutions in an intensively difficult situation.
Borrowers are faced with a situation where they have no money, but have legally bound themselves to a contract that they cannot complete.
While brokers suffer a blow to their professional reputation and credibility.
How a ghost lender ripped my client off $3.75m
One of my clients experienced the claws of a ghost lender firsthand.
He was a property developer from Wantirna (a suburb in Melbourne).
His former lender was about to take possession of his property due to default and he had just six business days to secure $3.75 million to save it.
In his desperation, he turned to what seemed like an ideal solution – another lender offering quick turnaround and favourable terms.
Initially, everything appeared legitimate.
The lender demanded an upfront fee, which the client promptly paid.
However, when it came time to settle, the lender vanished without a trace – after lodging a caveat on my client’s property so he couldn’t refinance it elsewhere.
The promised funds never arrived, leaving my client in a worse position than before.
The clock was ticking and the prospect of losing his property (and potentially being sued for breach of contract) became an imminent reality.
When my client approached us, he was understandably shaken and sceptical. His trust in the lending process had been shattered and he was running out of time.
Recognising the urgency of the situation, my team worked tirelessly to assess the case and offer a viable solution. Within five business days, we provided a loan at 70 per cent LVR, enabling the client to settle the transaction and retain his property.
Why is this happening?
Well, a few reasons.
The first is probably because the private lending space, unlike the big banks, is not that stringently regulated. It has created a space that has regulatory gaps that allow unscrupulous lenders to thrive.
These ‘legal loopholes’ make it difficult to track and hold ghost lenders accountable.
Another reason is the economy. The current climate has left many borrowers in precarious financial situations and urgency often overrides due diligence.
Ghost lenders exploit this desperation by offering quick solutions that seem ideal, but are ultimately fraudulent.
How to save your clients from ghost lenders
The rise of ghost lending requires a proactive approach to protect clients and brokers. Here are three critical strategies to safeguard against these predatory practices:
1. Do your due diligence
Your first line of defence is to do your research.
Vet every lender rigorously before engaging with them or recommending them to your clients.
Verify their credentials. Research their history. Check for reviews, testimonials, or references. Ask colleagues to see if they have experience dealing with the lender in question.
If you do not have time to do this because of the urgency of a deal, then you will proceed at your own peril.
2. Spot red flags
Ghost lenders often use specific tactics to lure unsuspecting clients.
Knowing these warning signs can help you steer clear of trouble.
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Offers that are too good to be true, such as unusually low rates or high LVRs.
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Requests for large, non-refundable upfront fees before providing any substantial loan documentation.
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A lack of transparency or reluctance to provide written terms and conditions.
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Unprofessional communication or vague responses to detailed questions about the loan process.
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Expensive valuations.
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Massive exit fees.
3. Have a backup plan
Despite your best efforts, sometimes deals can fall through unexpectedly.
Having a reliable backup plan can save your client from financial disaster.
I would suggest building relationships with trustworthy private lenders. Those with a good industry reputation, a proven track record, and high-quality testimonials.
Having a reputable lender on speed dial can make all the difference when time is of the essence.
Gee Taggar is the managing director of Archer Wealth.