When alt-doc is the best doc

Loan category enjoys resurgence

When alt-doc is the best doc

During and after the GFC the term “low doc” or “alt doc” became what the society and the media coined “liar loans” and, to be fair, in the context of the way some products were sold in the United States it wasn’t too far from the truth.

But 15 years on the product category is having a strong resurgence in Australia, not only from the standpoint of alternative or non-bank lenders but it is being combined with technology to provide some necessary liquidity to the micro-lending space (up to $200,000) – for example ANZ GoBiz lending solutions.

Read more: How to help clients with cash flow management

According to a government study, SMEs employ approximately five million people, comprised of just over three million in micro firms and another two million in small business. These businesses need to access capital for growth and to ensure viability – the alt-doc loan is a useful and very necessary tool for them. A business owner is very focused on ensuring the business is hitting sales goals and not always overly focused on getting his or her financials completed. 

The aforementioned resurgence in alt-doc is likely continue and is now being offered even by some of the major banks, in particular ANZ with their secured lending product.

Let’s dive a little more into why the product is becoming more popular for banks and borrowers.

When done well alt-doc loans are a strong tool for economic growth. Aside from the “self-verification” these loans are otherwise “prime” in the sense they are still subject to their usual lending criteria. This should not be confused with “non-conforming” loans which also relates to an applicant with credit issues rather than an ability to produce income documentation.

Low-doc lending can involve loan assessment based on any one or a number of the following:

  • BAS paperwork in the absence of accountant-prepared financials and tax returns
  • Accountant’s declaration documents verifying revenue
  • Borrower self-declaration
  • Lease document applications where assessment is completed on the strength of the standing lease over an asset only
  • Income verification by loan statement review
  • Or a combination of the above.

Why would a lender do this type of lending? 

The asset class is deemed low risk. It allows the lenders to be comfortable with the risk profile of its lending book, even if assessed on reduced information. Many of the decisions can be made using alternative verification techniques, such as those used by ANZ’s rapid refinance process – the lender is able to determine a borrower’s ability to repay a loan based on their repayment history.

The market is huge – low-doc lending plays a major part in the domestic lending landscape.  Recent research suggests that non-bank lending is on the rise with some suggestions that up to 40% of commercial lending is being fulfilled in the non-bank lending space, of which are large portion of lending is done on a low-doc basis.

With low-doc lending being synonymous with a smaller and simpler requirement for information, and NPS being a key focus of all lenders, the low-doc market offers a unique opportunity for lenders to get to yes as quickly as possible.

There is an ability for the lenders to achieve a greater margin on low-doc facilities than the highly competitive full doc space.

Read more: How to generate leads, diversify at the same time

When does low-doc lending best suit a customer?

There are many circumstances where low-doc lending can be the best option for a customer:

  • Financial data is incomplete – life is busy and many sound borrowers require some flexibility from a lender to support them into a new transaction because they simply have been unable to complete their financials in time.
  • You’re a small business – small business is tough and low-doc lending via the verification of income from alternate means allows business experiencing the ebbs and flows of cash flow to be supported.
  • Recent changes in circumstances – low-doc applications are often used to assess clients who have had a recent change in circumstances (change in role in the same industry, relocation to another state, moving from part time to full time etc).  The traditional lending criteria of banks is rigid and often doesn’t cater for the nuances of everyday life.
  • You’ve experienced significant growth – traditional lending applications often take a two-year average of income for assessment, which sometimes doesn’t provide the support for high-growth customers. 
  • Speed is of the essence – bank and non-bank turnarounds for this type of lending can be a fraction of the time it takes for a full-document application.  Many BDMs and brokers use these applications when presented with heavy penalties for customers who are unable to meet a short lead time.

What role do brokers play in this space

As brokers, it is our role to provide the most suitable and cost effective solution to our clients based on the information at hand and their ability to make repayments.

In many cases for SME or self-employed clients this will involve offering an alternative to a standard full home loan or commercial loan. Whilst it doesn’t mean you are able to shirk your responsible lending or BID responsibilities, it is an important and necessary tool to ensure that the economy keeps turning.

Ryan Nelson (pictured) is the director of Sales at Simplicity Loans and Advisory.  He leads the sales and distribution functions for the business.