The emergence of near prime
David Lownds (pictured) is head of marketing and business development at Hanley Economic Building Society
The days of sub-prime are not gone, or forgotten, but times have changed and so have the ways in which lenders deal with borrowers possessing a not so squeaky clean credit history or enduring a life event which impacts their borrowing potential.
In a move to distance ourselves from some darker days, a new lexicon has emerged to describe this type of lending. Terms such as near prime, complex prime, credit repair and impaired credit – amongst others – have been created to reflect a modern lending environment and help differentiate between a variety of borrowing needs.
It’s easy to say that lessons have been learned but actions often speak louder than words.
Lenders need to be more transparent than ever across all product types, and especially so when offerings are not deemed to be the primest of prime.
And there is additional accountability when it comes to providing reasonable rates and sensible criteria when servicing this somewhat vulnerable lending band.
As a lending community we have certainly made positive strides in the right direction. Affordability testing is far more robust and the list of criteria requirements is very different but solutions still need to be found for a range of borrowers.
Life can often be a complicated matter, and whilst no one wants to think of events in their life which may put a strain on their short-term financial position – life does happen. As a potential consequence, a mortgage payment or two may be missed or unsecured loans defaulted on and these are the issues which can become historic over a relatively modest period of time.
Finding a lender who will consider a life event when sourcing a mortgage isn’t always straightforward. It’s these types of borrowers who often don’t fit with the strict lending criteria of high street and mainstream lenders, a factor which highlights both a lack of readily available options and opportunity.
Niche markets are where smaller; more flexible lenders can really come into their own. Many lenders operating within this space will have slightly differing criteria but the most successful ones are driven by manual underwriting.
Through this process there is far less chance of a case being immediately written off and not caught up in a tick box mentality and/or a computer says no attitude. Back in September 2017 we launched into the near prime sector with a single product.
Each case was, and is, underwritten manually with no credit scoring and a timely decision is made to result in a straight talking yes or no decision.
Following a successful launch period we have since carefully extended this range, but this was only done after engaging extensively with customers and the intermediary market to ensure we could help these types of borrowers in the right way.
The intermediary market remains vital for this band of borrowers. To help further support this, and meet the needs of more borrowers, lenders must continue championing the importance of the advice process for those with even a slight blemish on their credit history.
And, in a similar vein, it would be foolish of lenders not to collate relevant information from intermediary partners to keep abreast of what type of historical issues their clients are trying to overcome and how they could better assist them in their future requirements.
So, following intermediary feedback, we recently made some criteria changes meaning we will now accept applications from borrowers who have been in a Debt Management Plan (DMP) for over 12 months without a missed payment.
A typical DMP can last around eight years so allowing applications after just 12 months means we can potentially help clients much sooner than they think.
We also now allow applications from prospective borrowers who have missed one mortgage payment in the last 12 months.
For clients with an existing mortgage missing a mortgage payment can result in their lender not offering a competitive retention rate when their deal expires, so it’s good for intermediaries to realise that another option is out there.
Supporting customers who have had to endure a life event has always been very mutual thing to do. Such people should still have access to a mortgage at a competitive interest rate and not be thrown on the borrowing scrapheap unnecessarily.
Yes we still have to be very careful in our underwriting to ensure this type of lending is sensible and appropriate. Yes we have to acknowledge the past and learn from it. Yes there is also much more we can do to push the lending boundaries within this sector, although – quite rightly – regulatory concerns do govern this evolution to a certain extent.
Thankfully, there are a growing number of lenders and products available for those with a slightly tainted credit rating through to those with a string of past transgressions. And this is a sector which will continue to develop and is one which intermediaries should follow closely over the course 2018.