We need to pay attention to a network generated by brokers because they effect borrowers and lenders negatively.
Problematic loans are one of the contentious issues through the Georgian financial sector. A large share of borrowers is unable to repay their loans on time, thus facing negative consequences. Amidst the various forms of loans, mortgage loans exceed in the severity of such consequences. A mortgage loan is a heavier liability with the pledged property at risk. Not long ago the government was asked for financial assistance after the growing anger between borrowers and lenders, lead to protests and, in some instances, violence.
Currently, three types of lenders operate on the Georgian market: Banks, MFOs and private lenders. A loan agreement is concluded between a lending party and a borrowing party. In Georgia, it is not unusual that borrowers and lenders find each other using the services of private loan brokers. But this additional component brings in several difficulties.
Citizens owning desirable property with legal income and a good credit history, find it unproblematic to receive loans at acceptable market conditions from a bank. But borrowers who cannot pass the risk assessment, for reasons such as a declined credit history, must look for financial alternatives.
In most cases, borrowers desperately turn to loan brokers to source lenders who, if the collaterals are covering the default losses, are unaffected by the liquidity of their loan portfolio. Commonly, loan brokers earn transaction fees each time they initiate a loan contract and profit from higher loan amounts, shorter loan terms and higher payment delay penalties. Short-lived loan terms and elevated payment delay penalties increase the frequency of turnover. Moreover, by not being a contract party of the loan, they suffer from zero risks and have no liability should the contract party default on its obligations.
Brokers have access to all private lenders which serves as the main reason for borrowers referring to their services. In comparison to lenders, borrowers have more flexibility in avoiding brokers’ services altogether. However, lack of motivation hinders their flexibility. On the other hand, lenders are tied to the brokers because of their access to and knowledge of various willing borrowers. If we observe the “Sityva da saqme” magazine’s lending section announcements, in 99 occasions out of a 100, a broker is negotiated with when searching for a lender. The scheme of brokers is the following: borrowers are placed in one basket and exclusive lenders in another with a promise that the borrowers will be given the best conditions and choices for extracting loans. However, this eliminates other possible alternatives and choices for the borrowers and limits them to brokers’ suggestions.
Brokers begin coordinating with other brokers, rummaging through their baskets for more suitable customers when they lack desirable customers of their own. Because they organize the meetings of the borrowers and lenders, they receive high income but with several brokers involved, the risks rise simultaneously. Moreover, they create informational vacuums and obstruct borrowers and lenders from finding other alternatives. This means that if borrowers want direct cooperation with private lenders, a broker has the chance to manipulate their chances.
Brokers have bigger influences than we can imagine. In attempts to maximize their profits and commission fees, brokers invent and turn their legal and illegal schemes into realities. Broker’s schemes are full of machinations, but also very refined. Commonly, the hunt starts directly at banks. Once a customer is denied a mortgage bank loan, a broker swoops into the disappointment and offers their services with promises of good deals and conditions. Like moths to a flame, customers find the offers tempting and accept the proposals. Once borrowers decide to corporate with brokers, they are asked to pay a percentage of the loan and a broker’s commission fee (sometimes for multiple brokers). To illustrate, if I am taking a loan using two broker companies, I need to pay 3% of loan for each company and 3% to a lender which amounts to a catastrophic 9%, instead of just 3%.
Brokers work with other schemes and tactics, one if which is to lend loans to borrowers themselves. They already have borrowers in their baskets, so for themselves they choose the ones who will pay more commission fees and pay on time. Other borrowers go to other lenders which results in the supply and demand never meeting each other because of brokers’ vast control and manipulation. They like to generate situations involving substantial risks. Why? Because a borrower is under the risk of being uncappable of paying the loan and, therefore, losing his property to the brokers. Lenders are lured into mistrusting brokers who attempt to delay a borrower’s payment to the banks. When the case of selling the property approaches, a broker enjoys the process because selling a property requires time and an agreement between both sides.
Then, a lender buys a property to get his money back and a few to give to a borrower. The main cause of this misfortune is a broker, who had to think before what kind of risks would he expect. Although, there can be worse cases when a borrower can’t pay monthly fees and he needs a refinance. In this case, a broker will find another lender for this borrower and will refinance this loan, getting their own commission fee. This kind of refinances are not stable and require a change in lenders, averagely per 2-3 months. With each refinance, a broker gets its percentages. Moreover, there are instances when a borrower must make 5-6 refinances per year. If a broker gets 2% per refinance, the cost for the borrower becomes enormous, at which point, selling off the property in the beginning begins to feel like the better option.
The situation described there is problematic and requires solutions. Firstly, we need to provide people with alternatives and fill the gaps in knowledge created by the informational vacuum. Borrowers and lenders should be given the freedom of choice to weigh the options offered by the market and, finally depending on competition, choose the best offer. It is essential to perform legal controls and initiate activism from corporations for solutions.
Evidently, mortgage loans are an epidemic in Georgia. With time, an increasing number of people fall into these traps. Although, the issue has improved. Recently, the company “Creditplatform” emerged in the Georgian mortgage loan market. It provides an opportunity to receive or deliver a loan online, without any involvement of a third party. In this case, you are exposed to all kind of lenders with firm confidentiality. A borrower makes a loan request and connects with all kind of lenders. The quantity of competing lenders drives lower commission fees, loan rates and provides good conditions to each loan.
Although, we still don’t know how attractive this offer will prove for customers and only time will tell. However, a serious approach is detrimental and multiple solutions are mandatory.
Most importantly, everyone must take matters into their own hands and contribute with their own abilities to save time, money and stabilize security.