Full Doc It - Latest News

As the lo doc market shrinks, it's time to resurrect the forgotten art of traditional credit assessment for self employed applicants.

In 1999, when the first Lo Doc Product was launched in Australia, no one could have predicted the extensive growth and popularity of self certified lending. The feeling at the time was that Lo Doc loans suited a small niche of self employed applicants who hadn't yet prepared their tax returns. It was high risk lending and with a premium interest rate for the privilege.

Until that time, credit analysts waded through complex accountant prepared financials and intricate company structures and family trusts to follow the money trail when assessing loans for self employed applicants.

In the last five years, self certified loans have become standard fare for the majority of lenders. As competition ramped up, Lo Doc interest rates and products came into line with full doc pricing and products. It made sense to avoid the hassle of reading complex financials and long involved conversations with accountants. It was just easier to submit a loan as a Lo Doc application. The new generation of lending officers and finance brokers have not had to deal with the complexity of financials for company and trust structures when assessing a loan.

Within five years of the launch of Lo Doc, 80% of the applications received by Barnes Home Loans were self certified loans. As an increasing number of these loans are falling into arrears, the LMI's and funder's now see Lo Doc Loans as a higher risk loan. Investors risk appetite is at an all time low and increasing costs of funds have caused Lo Docs to become less profitable or viable to fund.

Now Lo Doc guidelines have tightened, the need for understanding business financials for self-employed applicants and small businesses is an absolute must.

When dealing with a complex applications ask the customer for written permission to speak to their accountant. For complicated financial structures, it is a good idea to present the lender with accountant prepared income flow charts. This will greatly assist the credit assessor's understanding of the applicant's income trail.

Investigating changes in profit from year to year is imperative. An applicant may have had an illness, an overseas trip or a non-recurring expense in the last financial year which may have affected the bottom line.

Alternatively, there may have been a significant increase in income. A company may have picked up a new contract or implemented a successful advertising campaign. If these mitigating circumstances are explained when submitting the application to the funder chance of approval is much higher.

Each LMI and Lender will have differing rules regarding add backs so it is a good idea to be conservative. Initially try to service the loan on the Net Profit figures only.

It is also important to look at the balance sheets as it will give you an idea of the stability and cash position of the company. What is surprising is how many Lo Doc Loan applications submitted and declined over the last few months have been resurrected under full doc guidelines. Given the reduced scope for Lo Doc Lending, it is time to roll up the sleeve, find an empty desk, spread out the paperwork and return to traditional credit assessment practices.

Janelle Rayner
Managing Director
Barnes Home Loans Pty Ltd