Lending to the Right People: How we Run Our Credit Check Process

As an investor, one of the key evaluations to take into consideration when making investment decisions is what level of risk there is. In peer-to-peer lending, one of the biggest variables is the person or entity that you are lending your funds to. Of course, with any investment there is an element of risk involved, but one of the most common questions we get from prospect investors at Southern Cross Partners is around the credit check process and how we vet borrowers before offering them a loan that's available for you, the investor, to put your funds into.

There are many measures that we take to insure that your investment has minimal risks, the most important being that your investment is supported by a first mortgage registered against New Zealand property. If something goes wrong and the borrower is unable to pay, this acts as collateral to cover the costs. To further lower the risk and avoid situations like this, we run a thorough credit check to understand the full picture of a borrower before signing off on a loan.

We spoke to our Credit Manager Mark Whelan, who heads up the loan assessment team and oversees  credit applications, to gain some insights into the finer details of the credit check process. We hope that this helps to answer any questions, but if you have anything else you'd like to cover in detail, please don't hesitate to get in touch.

1. We assess the security that's on offer

The primary check that we make when we go into a deal is around the security or asset that's on offer. Ideally what we're looking for is whether a borrower has high equity in the property they are offering as security - essentially, the more equity a borrower has the better, as if something was to go wrong, there's more security and 'skin in the game' so to speak.

The types of property that we consider under 'security' can vary, from residential to commercial or bare land, but the common denominator is that it must be property that we can register our name legally on a title so that it can be sold if need be.

The major consideration for the credit team is "is this property something that we could sell quickly to recoup loan costs?" . The answer to this is based on many factors, from location, to the condition of the property and LVR (Loan to Value Ratio), and to reach a conclusion we draw from supporting information such as registered valuations, market research, experience and industry experts.

2. We assess the credit history of the borrower

The next step in the credit check process is to run a credit check on the borrower and understand their borrowing and repayment history up until the point of the application. There are a number of considerations during this process, the key aspects being:

Income Stability

Work history and income are an important piece of the puzzle. This doesn't necessarily mean that just because a borrower has been out of a job for a short period of time (3-6 months) we'd rule out lending to them, more so that we'd look into the industry they've been in beforehand and their work history.

Typically traditional banks see job changes as an indication of slightly higher risk, but our job as a risk assessment team is to look at the full picture. For example, if an individual has only been in a job for 6-months in total, but their previous employment was in the same or similar industry and they held that role for a significant length of time, this would be seen as lower risk. Usually, we'd look into the past two - three roles.

Client Background

We're also looking for the story around each borrower and to understand what stage they're at in life. A key measure we use to test that is the 'age to asset' ratio, paired with an empathetic approach to their life circumstances.

For example, if you take a 50 year old person with minimal assets, this again could be seen as slightly higher risk. However, we also like to understand how they've come to be in their current position - for example, a divorce, business failure or illness may have had an impact on their financial standings, as opposed to mismanaged money or poor investments and again, is viewed as lower risk.

Goals and Loan Purpose

The final piece of the 'borrower's background' puzzle is what they're trying to achieve and the reason that they've taken out a loan with Southern Cross Partners as the loans we offer are short term. Our borrowers are often looking for options to bridge gaps or create short term solutions, and understanding the 'why' behind their borrowing helps us to paint the full picture and better assess risk.

3. We run a full credit check

The next important piece of the credit assessment process is the formal credit check, that we run through Centrix, the credit bureau of New Zealand. This credit report provides a  breakdown outlining the potential borrowers financial history, including:

• Who they have applied for finance from in the recent past
• Any loans they have defaulted on with other companies, when they were and for how much
• Companies they may be affiliated with (directorship) and any insolvency records
• A credit score that provides a snapshot of an individual’s creditworthiness – the lower the number, the higher the risk

In a similar way to how we approach the other elements of assessing a borrower, we're also looking to understand any adverse marks on a credit check that comes back to us. Again, major life events can be responsible for adverse credit ratings, and we seek to understand the 'reasons' behind any blips on a credit report. We have a saying in the company that 'Bad things, can happen to good people' and we often lend to borrowers with explained credit defaults.

It's all about understanding the whole picture

We want our investors to be as a comfortable as possible and to mitigate investment risk as much as we can, so it's our duty to ensure that our credit check process is robust. In a similar vein, we also have a responsibility as a lender to do our due diligence to make sure that we only lend to borrowers who are in a financial position to afford it.

If a borrower's history comes back to us showing a poor credit rating with multiple defaults, low income to service the loan repayments and they have low equity, it's in the interest of Southern Cross Partners, our investors and our borrowers, not to lend the funds.

In saying that, we pride ourselves on having a 'full colour' credit check process as opposed to the traditional 'black and white' metrics that banks and other lending entities go by. This means that in many circumstances, we are able to create win-win situations: finance to a borrower which puts them in a better financial position, and a risk-assessed investment opportunity for the investor that provides many happy returns.

If you have any questions around our lending, borrowing or credit check process, please click the button below to get in touch with one of our team members.