Non-bank lender Pepper Homeloans says it will target small business owners and the self-employed after purchasing a $5 billion mortgage portfolio from GE Capital.
The deal was completed yesterday at a slight discount to book value. A final price was not disclosed, although Pepper Homeloans managing director Patrick Tuttle has described the deal as “transformational”.
“This acquisition really leverages Pepper’s core skill in underwriting residential mortgages and also servicing residential mortgages,” Tuttle says.
“It presents us with a unique opportunity to further expand our existing business model into prime residential lending, extending our specialist product suite.”
Earlier this year, Pepper Homeloans chief operating officer David Holmes said Pepper would push into the SME market in 2011 following its sale last June to US-based investment firm Aladdin Capital.
“We are looking for opportunities to move into equipment leasing, commercial financing and debt management [as well as] further debt servicing opportunities,” Holmes told StartupSmart.
Pepper also writes home loans to borrowers who fall just outside the credit criteria of major banks, and is working to overcome broker hesitation about selling low-doc loans under new consumer credit laws.
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The National Consumer Credit Protection Act, which came into effect on January 1, requires greater scrutiny of low-doc clients and has made many brokers and lenders cautious about dealing with such clients.
The laws are expected to have a severe impact on self-employed borrowers, as it is typically more difficult to assess the financial position of these borrowers.
Holmes said Pepper would continue to service niche markets outside the major banks, including self-employed borrowers.
“There is a lot of growth potential in our mortgage business as credit access from major banks remains difficult,” he said.
The deal comes on the back of new data from DBM Consultants, which highlights the emergence of a new attitude towards debt among SMEs, particularly among micro businesses with annual turnover of less than $200,000.
The data, based on an annual survey of 19,250 businesses, shows that for businesses with an annual turnover of less than $5 million, debt intentions for the next 12 months were evenly split towards the end of 2010.
But since then, those planning to increase debt levels outnumber those planning to decrease debt by 20%. DBM managing director Dhruba Gupta says this is good news for the banking industry.
“Micro businesses have only small debt needs individually, but they account for three out of every five businesses in the country,” he says.
However, Gupta said this will not necessarily result in a recovery in business borrowing.
“Our survey shows cost factors – and in particular interest rates – are out in front as the most commonly cited concern for business that could deter them from further debt,” he says.
“Further rises in the official cash rate later this year could have a big impact on business borrowing expectations.”