I recently attended a ‘complex prime’ lending roadshow. There were many reasons I wanted to attend, taking into account the many different hats I have to wear for the different businesses I am involved with. One of the main reasons I wanted to attend was that I wanted to learn, first hand, how complex prime lending policies were evolving. If one casts one’s mind back a decade and a half, lending polices evolved, but they did so relatively slowly. However, looking back at the headlines and the post event regulator/legislator criticism of lenders, one would gain the impression that the lowering of credit risk requirements was a rapid journey. Analysis shows it was actually slow and took a number of years before the whole pack of cards tumbled down. Looking back it is clear that ‘back then’ creeping credit risk was exactly that, but that leads us to today. So, what is happening now?
Frankly, I was astonished at how quickly the lowering of credit risk requirements is moving. Whatever the opposite of ‘creeping’ is, then that is what is happening in the complex prime arenas today. Complex prime should, I think, relate to ‘prime’ customer who might have a few unusual circumstances; maybe they have more than one job, maybe they are part employed and part self-employed, maybe they have a bit of historic adverse credit. These customers should not be seen as sub-prime, they just need a more specialist underwriter (probably using a manual process) to accurately assess the lending risk. To my mind, complex prime should not be a fancy new phrase for old fashioned sub-prime. But complex prime has evolved so far that at one end of the scale we are actually talking sub-prime – it’s just not a word lenders like to use now. The flight across the credit risk profile has been mightily fast this time around – where on the earth will we end up! Strangely regulators have taken steps to make lenders assess buy to let propositions prudently, but the ‘blinkers’ appear to be on when it comes to sub-prime – sorry call that complex prime.
I was astonished at how quickly the lowering of credit risk requirements is moving.
So how far have we gone already? There seems to be a battle as to who will take the largest number and value of CCJs/defaults, who would lend where IVAs are in place (and the treatment of those arrangements), whether loans would be made if payday loans appear on bank statements or not, etc, etc, etc. Sales teams were even explaining how brokers should help customers mask their gambling histories from future lenders – I won’t go into detail here, but needless to say I thought I had fallen asleep and woken up in 2006!
Clearly lenders must manage their position with regulators and funders. However, the wider question for intermediaries is, is this good for customers and how does it influence advice. There is no doubt we are back to the situation where any person with almost any circumstances can obtain a loan (and that’s a direct quote by the way), but does that mean a broker should actually encourage such borrowing. I have witnessed, in one of my business worlds, a significant amount of litigation against advisers for allegedly negligent advice – these actions span a wide range of products including self cert, interest only, lending in retirement, etc. I can already foresee a rise in litigation in respect of advice in this type of lending. The message should be clear, sellers of this type of business need to professionally consider the needs and circumstances of their customer and make sure that having considered all these needs and circumstances the advice is appropriate. Sometimes this might involve arranging no loan, even if one is available (at a price).