Rawson survey uncovers main reasons for banks' rejecting bond applications
In an attempt to better understand the reasons why South Africa's banks across the board reject a fairly highly proportion of the mortgage bond applications that are submitted to them, the Rawson Property Group commissioned former ABSA bank Regional Manager, Mike van Alphen, to go through a large sample of Rawson Finance's July bond applications and analyze the ostensible reasons for their failure.
Van Alphen, now with Rawson Financial Services, reported back to Bill Rawson, the Chairman of the Rawson Property Group, and Tony Clarke, the Managing Director, that the chief reasons for the 'declines' had been:
"This cause," said van Alphen, "accounted for 32% of the rand value of the rejected files. What is more, the banks, it has been shown, are fairly consistent in their assessments: in more than 90% of the cases, at least three (sometimes more) of the banks took the same stance on the rejected applications, always giving the same reasons, i.e. unfavourable credit records."
Checking in certain cases with the credit bureaux, the investigation found that these failed applicants usually had two or three court judgments against them and some had had unpaid debts written off by the banks.
"Bad credit records, therefore, emerged as the prime reason for bank rejections," said van Alphen, "and this should be borne in mind by any bond mortgage applicants."
The other main reasons for rejections had been:
Every loan application is fully screened by the bank and points are allocated based on the criteria in bank's "Credit Score Card System". If an applicant does not reach a certain minimum level of points, the application will be declined. 18% of the rejected applicants were due to the client not reaching the minimum credit score. Such clients, said van Alphen, could probably not afford the bond, alternatively their conduct on existing bank accounts had been unreliable (they had often responded negatively to bank requests for details). In addition, the banks took a hard look at the applicant's employment record: excessive job swapping and long periods out of work also counted against acceptance.
As in the above category, the applicants here were rejected because investigations into their financial standing showed that they either did not earn enough or, more commonly, that they had not disclosed all their expenses to the consultant. Undisclosed expenses were often uncovered by the Credit Bureaux and the banks own records.
"These obviously affect the client's disposable income and his ability to repay the new loan," said van Alphen.
In certain cases it was however possible to prove that the outstanding accounts had in fact been settled. Nevertheless, 12% of the rejected applicants were disqualified on this count.
12% of applicants were rejected for this reason. The applicant's position in many cases looked sound on paper, but his actual cash flow was insufficient. Self-employed people were seen as particularly vulnerable in this respect, financial accounts often revealing long lag times by debtors or payment defaults to them.
11% of rejected applicants were turned down for this reason, the applicants existing record with his or her bank being already tarnished. Refer to drawer cheques, unauthorized overdrafts and arrears on loan accounts and credit cards were the main reasons for the banks' lack of trust in such applicants' financial reliability.
This factor, as already mentioned, resulted in a small but significant group being rejected, particularly if their accounts showed an inability to prove the income they claimed they were receiving. It must also be noted that all banks require a self-employed applicant to have at least a 10% deposit and reserve the right to call for a higher deposit to be paid.
Once the bank had assessed the mortgage bond application, they sometimes decided that they would grant a lower bond amount than that applied for. This would be based on one or more of the reasons mentioned above. In many of these cases the client did not have the extra cash required for the deposit and the application was closed.
In 3% of cases the applicant's business or corporate accounts were either not available or were not in apple pie order which led to rejection. In one case (only), the failure to produce the required additional documents within the stipulated time also led to rejection.
"Obviously," said Bill Rawson, "this report will be valuable to our bond origination division and will help them to hone up their skills in pre-qualifying applicants. Nevertheless, the information above should also be taken to heart by all individuals planning to apply for a bond. They should set about establishing clean records long before they get to looking at houses and applying for finance. South Africa's banks are, by and large, efficient and their score card system, although regarded by many as inflexible and a little too conservative, has in the last two years ensured that very few 'dicey' applicants are approved."
Rawson Financial Services Press Release