What percentage of your prospects become declines rather than clients because they don’t meet the necessary financial profile?
For many brokers, this could be a significant percentage of your potential business. Some of the following reasons may be familiar: 1) Prospective client’s Beacon score is too low to qualify for credit. Decline; 2) Prospect’s debt service ratio exceeds guidelines. Decline; or 3) Prospect’s credit report indicates defaulted debt with creditors. Decline.
But what if you could transform these high-risk prospects into future low-risk clients?
Today, every prospect represents an important potential source of revenue for mortgage brokers. Access to non-traditional mortgages has sharply receded as Canada’s alternative lenders confront growing pressures from the US sub-prime mortgage crisis battering the Canadian lending environment.
Competition for financially healthy borrowers is also intensifying, as traditional mortgage lenders grow increasingly reluctant to lend to higher risk prospects.
But brokers don’t have to turn away applicants who don’t meet lending guidelines for financial reasons. By referring unsuccessful borrowers to appropriate financial professionals, you can enable declines to improve their credit worthiness – and return in the future as qualified borrowers. (See sidebar below for an example.)
The reality is, in the coming months, mortgage brokers are likely to see more financially-stretched prospects. According to CIBC World Markets, the debt-to-income ratio rose from 122% to 130% over the past year. At the same time, with the continuing credit crunch and losses by insurers in the US, some mortgage providers will no longer lend to applicants who do not qualify for mortgage insurance.
Fortunately, there are numerous sources to which you can direct declines to help them turn around their financial situations – while allowing you to keep the door open to future business. The following financial management services are offered by a range of professionals, including credit counsellors, debt management consultants and bankruptcy trustees.
Improving credit profiles
For individuals who do not have a credit track record or have a low Beacon score, strengthening their credit profile may help them obtain the financing or lower-cost borrowing they need.
In order to improve a credit score, a consumer must first address any arrears and excessive debt. This often requires some time, patience and the assistance of a financial professional.
A credit counsellor or debt management consultant can help develop a customized strategy that includes accessing new revolving and instalment credit, which are reported to national credit bureaus. Effectively managing this credit can boost an individual’s credit profile.
Debt management and credit counselling
For those who have the ability to repay their debts but do not qualify for a debt consolidation loan with a lender and need some time to repay creditors, a debt management plan may help to improve their financial situation.
This is a voluntary agreement between a debtor and some or all unsecured creditors to reduce interest payable.
A credit counsellor or debt consultant negotiates with creditors to accept reduced payments, pools debts into a single monthly payment with a lower interest rate and then allocates this payment among the creditors. The plan continues until debts are cleared.
Consolidation order and voluntary deposit
A consolidation order is an option available under the Bankruptcy and Insolvency Act for residents of Alberta, Saskatchewan, Manitoba, Nova Scotia and Prince Edward Island.
The Code of Civil Procedure offers residents of Quebec a similar option – a voluntary deposit process.
These solutions require full payment of debts, usually at lower interest rates, within three years. They establish amounts and times when debtors must make payments to the court, which distributes payments to creditors.
Consolidation orders and voluntary deposits stop actions from creditors and prevent garnishment of wages. A licensed bankruptcy trustee is needed to administer the plan.
A consumer proposal is a legally-binding settlement agreement used to restructure unsecured debt that is available to individuals who can’t pay debts as they become due.
In 2005, the federal government introduced a package of longawaited amendments to Canadian bankruptcy legislation. Bill C-12 received Royal Assent last December. When it becomes law – likely this year – the debt limit for consumer proposals is expected to rise from $75,000 to $250,000 per person, enabling more people to utilize this debt-reduction option.
When individuals file a proposal, they retain all of their assets, with the exception of any that have been pledged as security. Most debts, excluding mortgages, Canada student loans less than 10 years old, child/spousal support payments, court fines and secured debts on assets the individual wishes to keep (such as an auto loan when individuals wish to keep their cars) are included in a proposal.
A consumer proposal is administered by a bankruptcy trustee – a financial professional licensed and regulated by the federal government. Consumer proposals can be filed in all Canadian jurisdictions.
When a trustee files a proposal on behalf of a debtor, unsecured creditors are legally prohibited from instituting or continuing legal action. Interest immediately stops accruing on amounts owing t unsecured creditors.
A trustee will typically develop a proposal offering creditors an arrangement of payments based on the debtor’s ability to pay. This arrangement may be in the form of lump sum, monthly and/or balloon payments over a period of up to five years. A consumer proposal often results in a reduction in the overall amount owed.
Once the proposal is accepted by the majority of creditors and is approved by the court, the debtor makes payments to the trustee according to the terms of the proposal. The trustee then makes payments to the creditors.
If a debtor’s financial situation improves during the proposal period, there is an option to accelerate payments to speed up the completion of the proposal. When all payments have been made, the trustee issues a certificate indicating that the terms of the proposal have been completed. Any balance still owing to unsecured creditors is legally forgiven at that time.
When a debtor has successfully completed most or all of the terms of the proposal and has taken the necessary steps to rebuild a credit profile, this individual becomes a more appealing financing prospect to lenders.
A voluntary filing for personal bankruptcy may be the only solution for those who don’t qualify for a consumer proposal and can’t reorganize their debts to meet regular payments or their wages are garnisheed. Bankruptcy is a legal process that provides these individuals with immediate financial relief by stopping legal actions by creditors.
The individual filing for bankruptcy surrenders most assets (specifics vary among provinces but, generally, a bankrupt person can retain a principal residence unless it has significant equity, as well as household items, pensions and some RRSPs and life insurance policies) to a bankruptcy trustee. Bankruptcy usually releases an individual from most debts (except for alimony/child support payments, court-imposed fines and student loans of less than 10 years) and splits the proceeds from the sale of the bankrupt’s assets among creditors.
Most of those going through the process for the first time receive an automatic discharge from bankruptcy after nine months. The bankruptcy remains on their credit report for six years after discharge – making it challenging to obtain credit during this time.
Bankruptcy, however, is a last resort, since many people can resolve their financial difficulties through the other above-mentioned options.
The next time you meet a financially-challenged prospect, think of the occasion not as today’s lost business opportunity, but as a marketing opportunity for the future. Referring your declined clients to the appropriate financial professionals may transform misfortune into fortune for them – and lost business into new sources of revenue for you. CMP
Eugene Migus is a senior vice president and trustee with BDO Dunwoody Limited (email@example.com); and Eric Putnam is a senior advisor and financial coach with BDO New Beginnings (firstname.lastname@example.org)