The lender also believes brokers can justify higher fees for credit repair cases and is warning that credit score-based underwriting may be hiding unknown risks for some lenders.
Magellan CEO Matt Gilmour told Specialist Lending Solutions he was pleased with the success of the securitisation and that it reflected the firm’s approach to lending.
“The securitisation shows that when you get the underwriting decision right, the loan book performs well,” Gilmour said.
“It was very well received by investors, particularly given our near five-year track record and demonstrates that our underwriting has been highly effective.
“We only have four accounts with three months or more arrears, and three of these are down to circumstances of accident, illness and redundancy rather than a lack of willingness to pay.”
He added: “We have a long-term plan with our investors and this stands out when some lenders are looking at much shorter-term funding arrangements.”
Credit scores hide unknown risks
Magellan is targeting customers with credit blips, those who are typically prime customers who have had something go wrong largely outside of their control or their normal behavioural pattern.
This sector of the market is a growing one as lenders recognise the escalating number of county court judgements being issued and other life events hitting borrowers.
But Gilmour believes some lenders are going further than perhaps they should be.
“We do see other lenders pushing the boundaries on credit standards and we understand that these moves have not escaped the attention of the regulator,” he added.
And it seems some lenders may be letting themselves in for a nasty shock if the results of analysis conducted by Magellan are repeated throughout the industry.
“We don’t credit score or use automated decisioning tools for underwriting our customer’s applications,” Gilmour continued.
“However, we collect the Experian CAIS scores from our customers’ credit searches for information and analysis purposes only.
“We found that over 70% of our credit repair customers have scores that are classified as either ‘prime’ or ‘near prime’.
“This illustrates that credit scoring can hide issues of which other lenders may not be aware,” he added.
£2,000 per case
Further research conducted by the lender suggested there may be as many as seven million people in the UK with some form of adverse credit.
But Gilmour believes these borrowers are being wholly underserved at present leaving a significant opportunity for brokers.
“We believe brokers can service this market and charge an adequate fee when doing so, given the extra work that may be required,” he continues.
“Given the time commitment required to place and arrange finance in this sector, catering for the nuances of the customer’s requirements and circumstances, an all-in fee of £2,000 to the adviser we believe to be justifiable.
“This would typically require the adviser to charge the customer their own fee in the order of £1,000 – £1,500 to augment the fee received from the lender,” he adds.
Evidence of life event
As Gilmour acknowledges, applications for borrowers in this sector to take more work and require additional evidence, but it comes down to assessing whether the client can afford the loan.
“We are much less concerned about the amount or nature of the adverse credit, and more concerned with the root cause and likelihood of it recurring,” Gilmour said.
“This is where our wholly manual underwriting process really helps our customers – credit scoring and automated decisioning cannot cater properly for our market.
“Depending upon the recency of the event we may want to know the details, and we will look for evidence to support the explanation provided.
“For example, if they were made redundant we will look for some form of documentary evidence such as a P45 or a redundancy notice,” he added.