29 Jun Author sheds light on shadowy world of lending
A newly written guide has shed light upon predatory lending practices lying within the commercial finance sector.
Researched and compiled by industry veteran Shane Reynolds of Reynolds Private Wealth, the book is entitled Get a Second Opinion before You Sign and has targeted the dual audience of consumers and mortgage brokers.
“I’ve always believed in giving the intellectual property to the people,” he told Australian Broker. “I had a number of fund managers tell me not to publish the book because it would take away an element of my advisory and their advisory business. They said I was giving the keys away; that clients would scrutinise our letters of offers and mandates. If you truly have a good business model then you shouldn’t concern yourself with the fine print. You should concern yourself with delivery.”
The book is about first and second tier lending, construction finance, preferred equity and distressed debt transactions and “lifts the curtain” on under-the-table practices occurring in an unregulated industry with no consumer protection, Reynolds said.
“The book covers the essential elements in the preparation of a mortgage application and the process for successfully obtaining a commercial loan. It is an informative and accessible guide to navigating the Australian lending/borrowing process.”
“Every broker in Australia should read this book 1) for product knowledge and 2) for developing that additional income stream and skillset to say to clients that you understand commercial loans.”
Unable to get loans from the banks, borrowers are “already distressed” before entering the unregulated commercial finance sector, Reynolds said. A further lack of knowledge from consumer and broker can put the borrower in a more vulnerable state.
“It depends on the desperation of the borrower as to the terms and conditions that they’re offered. You may find yourself in a situation where if you don’t fulfil your obligations under the agreement, you’ll have a caveat or mortgage on your property for fees. Unless you’re very well versed in commercial litigation, often you’re either faced with settlement provisions, terms with the lender or broker, or they simply enforce their position and sell you up.”
One common practice was what Reynolds called a “set up to fail” agreement in which the lender knows the borrower is going to default, using this as a way to create a deed of forbearance.
“Lending money is no longer built on the premise of receiving interest. It’s become about receiving interest and then taking the client’s security when their mortgage goes into default,” he said.
Aware of the client’s asset position, a lender may create a deed of forbearance, inserting additional security including a selection of properties that the client has in their portfolio.
“The moment the 60 days is up on the deed of forbearance, the lender then has rights against all those other properties as well. No one in their right mind would sign these agreements but borrowers are so in distress that they don’t know the difference.”
Without the equivalent of aggregators or franchises such as Yellow Brick Road or Mortgage Choice in the commercial space, residential mortgage brokers need to be doubly aware when seeking information in the opaque world of commercial finance, he said.
“If you’re going to deal with these people, then just beware of the fine print. Get a second opinion from your lawyer before you sign anything and if there are nasty clauses in those agreements, strike them out.”
Investigate different alternatives and lending processes, he said, adding that a lender or broker was not legitimate simply because they had a good website.
“We get brokers here in our office who have signed clients up to 2% per month bridging loans. The client could have been in a situation where if they had had the knowledge, they could have gotten a 12% per annum loan. The client’s effectively paid double for the finance. They’re also in a pickle because they’ve got a short exit strategy and can’t find a new place to go to because they’re paying through the roof for their finances.”
The only remedy to any issues in commercial lending was going to the Supreme Court, which is not only expensive but is a place where the “scales are already tipped” towards the lender, Reynolds said.
The hard and softcover versions of Get a Second Opinion before You Sign were published on 9 June with the e-book set to come out in four weeks’ time.