Welcome to the lucrative world of private mortgages
What is private mortgage brokering?
It involves introducing non-conforming borrowers to private investors so that the private investor can lend on a mortgage (in much the same way a bank
does). Instead of the lender issuing the mortgage documents they are issued by the lender s solicitor.
What is so good about it?
In general finance brokers who include private mortgages in their portfolio tend to drive better cars, have nicer houses, take their wives to nicer restaurants, have more free time, take longer holidays and smile more often,than brokers who don't. This is because:
a) The average brokerage for setting a private mortgage is between 1 - 2% paid upfront (between $5,000 - $10,000 on a $500k loan),
b) Borrowers are more grateful because you did what others could not do (and so you get more referral work, including conforming loans),
c) The turnaround is much quicker than a normal loan,
d) The paperwork & aggravation is much less than a normal loan,
e) As time goes on you will gain the confidence of particular lenders who will prefer to deal only with you. This goodwill is a valuable asset to your business because it represents a de facto exclusivity agreement,
f) You will acquire a reputation for being able to set loans which other brokers can t and they will begin referring work to you.
Private mortgage deals
Loans suitable for private mortgage loans are loans which are unsuitable for institutional, even non-conforming lending because:
(a) The LVR is too high (but is suitable for a 1st and 2nd together),
(b) The borrower was or is bankrupt (if bankrupt wants the funds to annul the bankruptcy),
(c) The security is specialised (like a restaurant) and has no track record of generating income (for example if the restaurant used to be a barn),
(d) If the borrowers are starting their own business and have no track record,
(e) If the money is required for a very short term, for example bridging finance for a month because of a notice to complete,
(f) If the borrower has no financials,
(g) If the security is commercial but generates no income (for example a block of land with no DA),
(h) If the loan is for a second mortgage,
(i) If the loan is for a combination of second mortgage & first mortgages and secured by several different borrowers who are business partners (or otherwise complex),
Much of the co-ordination of settlement is done by you.
In brokering private mortgages you will find yourself very much in the driver s seat. It will be up to you how fast or slow (or if at all) the loan proceeds. It is definitely not set and forget affair. If you are slack or do not have proper procedures the loan will not settle and you will earn the resentment of borrowers, lenders and their solicitors (which in turn will jeopardise your future business).
Loose lips sink ships !
Unlike normal loans you have to be very careful about what you say and write. When things go wrong with an institutional loan everyone tries to blame the big bad lender. With a private loan goes wrong it is always the big bad broker. You must not only have scrupulous integrity but you also need to be disciplined enough not to say things people will rely on to their detriment.
Good intentions are not enough.
There are laws which govern what you can and cannot do.
There are laws which your activities broking private mortgages will expose you to. You need to know what they are and how to avoid infringing them.
There are also the same laws which apply to all business activity, most particularly the rule against misleading and deceptive conduct.
In addition you need to be concerned about being sued for negligence.
Liability for negligence can be completely avoided so long as any statement or representation is made along with the appropriate disclaimers. It can be hard to prove disclaimers were given during telephone conversations so it is wise to keep them as brief as possible and ensure that all serious business is done in writing.
What is misleading & deceptive conduct?
Most brokers dismiss the possibility of ever being accused of engaging in misleading & deceptive conduct as impossible. They naively equate the words with criminals who forge payslips or fraudsters who embezzle loan funds. That s not how ASIC sees it. For them the phrase means anything which
will have the tendency for the person on the receiving end to form an impression which is false. It is not so much what you say as what the results are. For example someone advertising bank term deposits is allowed to show a picture of a happy elderly couple walking along the beach and to use words like guaranteed and fully secure if the effect is to attract vulnerable and unsophisticated investors seeking security. On the other hand that same advertisement is unacceptable for use in advertising a high risk debenture fund.
What are managed investment schemes?
Managed investment schemes are schemes where mum & dad investors invest their hard earned money in a scheme hoping to get a return on their nest egg. Over the years many fraudulent or just plain half-witted schemes have gone belly up causing the investors to lose their money. To protect investors the government has strictly regulated managed investment schemes. This means promoters raising money for time share accommodation, gold mines in Kathmandu, Avocado plantations, property developments etc must have their schemes operated by a licensed responsible entity and issue a Product Disclosure Statements (a prospectus).
ASIC is constantly on the lookout for schemes which mislead investors in their prospectus. If the prospectus fully & fairly discloses the risk involved the
fact the investment loses money is theoretically of no concern to ASIC. The idea is that investors must be able to judge the level of risk they are entering
into by being able to rely on what the prospectus says being true.
You do not want to run a managed investment scheme!
Running a proper scheme is a multimillion dollar commitment.You do not w ant to run a scheme, you simple want to broker private loans. There is no
special legislation which regulates brokering of private loans. However you must ensure your activities do not constitute the operation of an unlicensed managed investment scheme. To guard against this you must know exactly what one is.
You must not arrange a valuation until a lender is interested!
The lender should accept the loan in principle before a valuation is ordered then a valuation should be ordered from the valuer nominated by the lender
just as in the case of an institutional loan. The signed letter of offer should not be hawked around to potential lenders with a valuation attached.
You must not nominate the valuer!
By all means suggest a panel of valuers the lender might wish to choose from (and who you know are prepared to accept instructions from private lenders)
but ensure you do so with the templates supplied with this paper and in particular the disclaimer concerning the valuer s suitability and insurance.
You must not handle monies!
You must not handle the lender s money. This means you must never:
i) Bank the principal into your account or an account controlled by you,
ii) Bank interest payments into your account or an account controlled by you,
iii) Accept cheques payable to the lender or borrower and promise to hand them on,
iv) Arrange for interest payments to made to you, through you, or to have anything to do with you.
By breaking this rule you will be deemed to be running a managed investment scheme and the men in the white coats from ASIC will come and collect you and take you away.
You must not write to third parties indicating you act for the lender!
It is acceptable to communicate with all parties in the role of broker or intermediary but never purport to speak for the lender. If you are passing on
the lender s comments or instructions have him put them in writing and simply forward them to the relevant person. This will avoid the grief later on
of being accused of distorting what was said. Do not allow the lender to delegate authority to you to speak on his behalf.
Your role is as broker. You must do nothing and say nothing to compromise that or you will open yourself up to liability as an agent of the lender and to
accusations you are running an unlicensed investment scheme.
No Financial Product Advice!
The fact that the lender manages his own investment is also of significance to Chapter 7 of the Corporations Law which deals with the provision of financial
services. Even if there is no managed investment scheme concerned, a person can be found to provide a financial service and be regulated by Chapter 7 if
the person gives advice about a financial product. S 763A defines financial product to include a facility in which a person makes a financial investment . A necessary part of the definition of financial investment in is that the investor has no day-to-day control over the investment.Accordingly if you play by the above rules you will not be giving financial product advice.
Paperwork
An important part of fending off allegations of wrongdoing is keeping records which prove what happened and what the relationships between the parties
were.The best way to do this is to store your records electronically. That means scanning to PDF and shredding. The good thing about this is that when ASIC, the Department of Fair Trading, someone suing the lender, someone suing the borrower, someone suing you or anyone else issues you with a subpoena you can simply zip up a copy of your file and email it to them. There is no need to worry about whether they return it or to go to the expense involved in recovering a physical file from storage.
Electronic files cannot be tampered with. You cannot remove an embarrassing piece of paper from an electronic file (because all your backups are datestamped by the computer). This means when you get a subpoena you have no choice but to resign yourself to fate and let the chips fall where they may. This will subconsciously improve the quality of what goes into your files in the first place. In particular by using pre-thought out templates and following established procedures you can avoid nearly all the risks.
When you send documents by email always ensure that you print them to PDF first so that they cannot be altered. In particular you should never email your letterhead and scanned signature in word format. There are very cheap programs on the market that will print to PDF files (not just Adobe).
Business or Investment purposes
All private deals must be for business or investment purposes. That meansthey must be wholly or predominantly (more than 50%) utilised for business
purposes. There is no need to obtain a Credit Code declaration. In fact it is harmful for the lender if you do. It is far better that the lender s solicitor
obtain one (because the law states that if the person who procured the declaration had reason to suspect the declaration was false then the effect of
the declaration is nullified). Thus when a borrower wants to claim the loan was a consumer loan it will be you they accuse of evil far better it be the
lender s solicitor.
There really is no grey area when it comes to the purpose of a loan. If the loan is refinancing a loan that was used to buy the house they live in then the loan is a consumer loan. Only if the original mortgage was paid off and the existing mortgage represented funds borrowed wholly or predominantly for business purposes could a mortgage over a borrower s residence be considered business purposes.