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Private Lending (3) – Market Needs?
Continuing from the last post, I researched several core business departments, but I didn’t know which ones were the most crucial. I tried my best to rank them in order of importance, then listed out each department and the people I had interacted with. After filtering based on my existing relationships, I decided to first approach an underwriter who I was quite familiar with and easy to talk to. I thought I might need to approach 5-6 people to get all my questions answered, but as it turned out, she was the right person from the get-go.
Her name is Jen. Since I usually work on cross-departmental projects, I’ve interacted with her quite a bit. I’ve noticed that she’s skilled in underwriting and is excellent at communication. She’s also the nurturing type who enjoys mentoring others, so we get along well.
I hadn’t thought about this aspect before, but now, as part of my due diligence, when I spoke with her, I hit the jackpot!
I asked her, “I noticed in the disclosure that this bank sends all the rejected deals to a certain fund. Do you know about this?”
She replied, “Oh, you mean xx’s daughter’s fund? That’s a pretty standard operation.”
I quickly followed up with my burning question: “You don’t lend to these borrowers, so why does the fund dare to take on this risk? Isn’t it too risky? “
She chuckled and said, “You haven’t been here long enough to know. You know that you’re now working on getting Bank’s license, right? That’s why we have to reject these orders. Actually, we’ve always had a trust license. For many years, we’ve specialized in these loans that Bank can’t handle. The costs are high, but so are the profits, and the risks are manageable. It’s pretty good. But now, with the pressure from above to get the Bank license, regulation has tightened a lot. Deals that we could handle before are now off-limits, so of course, we send them to that fund to keep the good stuff in house 😂.”
I asked, “So, what’s the difference between these two licenses in terms of regulations? Why could you handle them before but not now? There must be differences in risk, right?”
She explained, “Think about the typical requirements when you apply for a loan from a bank, like income, debt-to-income ratio, and credit score. They’re pretty strict, right? But the interest rates are low, correct? After we get the Bank license, we can only accept these A-class clients. But actually, since our establishment, we’ve been dealing with B-class clients using the Trust license. Their credit scores can be lower, their debt-to-income ratios can be higher than those accepted by banks, and we can qualify them based on company income. The down payment is usually higher than what banks require, like 30% or 40%, and so on… But our interest rates are generally several points higher than Bank’s (at that time, Bank was around 2%+, while this quasi-Bank was around 4%+. Now, in the current fragmented market, Bank is generally 5%+, and this quasi-Bank is already 8%+).
I said, “I still don’t understand why you dare to lend to those whom Bank won’t lend to. Could you please elaborate?”
She said, “It’s simple. If someone has high credit, a steady income, and isn’t overleveraged, they’ll definitely go to Bank for a loan, because they’re A-class borrowers, with good income and credit and no debt issues. They can put down 20% and get Bank’s A-class interest rates. This is the channel that most people know and only know about. However, many, many people don’t fit into this category. For example, many are self-employed. They don’t have regular income, and their personal tax returns don’t look good, but the money is in their company accounts. Their company has good income, but it’s not considered personal income. In these cases, we qualify them based on their company’s financials. The down payment is also higher, and the interest rates are several points higher, but both the company and the individual have to guarantee the loan. Doesn’t that sound good? There are also people who often get divorced, resulting in both parties having poor credit. Banks won’t lend to them, but they have a lot of equity in their house. One party wants to buy out the other, so they come to us. The down payment is extremely high, the house’s debt ratio is very low, and we can charge several extra points. Doesn’t that sound good? There are also people who specialize in real estate investment, who already own several properties. Bank won’t lend to them anymore, but we can calculate 100% of their rental income and cross-collateralize other properties, allowing us to charge several extra points. Do you think the risk is high?”
I 😂.
I still couldn’t quite believe such a good thing, so I asked, “What’s the default rate then?”
She said, “It’s similar to the big four banks, extremely low. You can check on the official website. Besides, the default rate isn’t important (I’ll explain this later). What’s important is that the funds can be recovered.”
I really felt like there was a way forward in this direction, so I quickly said, “Darling, I’m very interested in this area. Either I’ll treat you to a big meal, or I’ll pay you for consultation. Could you please share how to assess these deals?”
Next time, I’ll continue with super valuable information!