Pepper boss risks heat to pick loan pariahs

Paul Doddrell is lending to the outcasts of the mortgage market — and stuffing the big guns of Irish banking

There is a glaring omission from the logo for Pepper Money, an online mortgage channel launched in Ireland last week: the pepper is missing.

Apparently, peppers conjure up different ideas for different people. For some, a hot chilli springs to mind — the image used in all of the Australian company’s branding up to now. When others think of peppers, though, they imagine the sweet or bell variety. To avoid further confusion, Pepper Financial Services Group has decided to keep the name but lose the capsicum.

Mixed messages are best avoided when, after years of working from behind the scenes, you decide to come out and engage directly with the public. Until now Pepper has confined itself to managing other lenders’ mortgages as an outsourcing specialist or selling its own loans through mortgage brokers. Last week it stepped out of the shadows, offering mortgages directly to property buyers from its Irish base in Shannon, Co Clare.

“We always said, once we got comfortable working with brokers, we would offer mortgages direct to the consumer to capture a wider market share,” said Paul Doddrell, chief executive of Pepper Ireland. “We’ve got applications already moving through the process on the back of last week’s launch.”

Even though there are only five active players to choose from, the scope for another mortgage provider in Ireland is not immediately apparent. The market is stuck at lending of about €5bn a year due to a chronic lack of property to buy and lending curbs designed to prevent a credit-fuelled bidding war for the meagre supply that is available.

The result is that banks’ mortgage books have shrunk continuously since 2010, with customers repaying more than they borrow each year.

Yet Pepper sees a gap in the market — and believes there is a market in this gap. “Buy-to-let mortgage lending is very low because people haven’t had an offering that makes sense,” said Doddrell. “The self- employed and professionals working on contracts — doctors, for example — also have real challenges trying to get mortgages.”

In the absence of genuine competition, mainstream lenders can afford to be choosy about who they lend to, refusing to take any chances on customers whose earnings are awkward to verify. Pepper sees an opportunity to profit from their complacency.

Pepper is the only lender that will even consider the pariahs of the mortgage market: those who have survived the economic crash but with blemished credit histories. “You’ve got people with a legacy credit event — they lost their jobs, they’ve been ill. This is where Pepper plays globally,” said Doddrell. “Effectively, we’re creating a new market.”

These customers are charged premium rates of interest. While Pepper’s standard rates start at 3.1%, the best deal for the self-employed is 3.35%. Borrowers with blemished credit records, so-called near-prime customers, pay at least 3.85% interest. Buy-to-let investors pay a minimum of 4.4%.

As well as exploiting niches overlooked by the competition, Pepper is betting that mortgage demand must grow eventually. It expects the overall market to reach €8bn a year by 2020, assuming progress is made on sorting out the housing crisis. “We’d be happy doing €300m-€400m a year; we have a see- how-we-go approach,” said Doddrell. “A lot of this is determined by the growth of the housing market — there are obviously massive shortages — and the strength of the economy.”

Another determining factor will involve coaxing customers out of their inertia. Doddrell admits that near-prime lending has been a slow burner, mainly because borrowers with credit problems in the past assume that nobody will touch them.

The switching market, an obvious way for a newcomer to poach customers from banks that are charging over the odds, has flatlined for similar reasons. Only 533 homeowners bothered to move to another lender in the first half of this year, according to the Central Bank of Ireland, even though it estimates that switching offers the potential for about 27,000 households to save more than €10,000 over the life of their mortgages.

“There’s a fear among consumers that they won’t be able to get a mortgage,” Doddrell said. “They think, ‘I’m going to be declined because nobody’s lending.’ This is a message we’re trying to work through. We’ve got some ideas about how to make switching easier.”

Pepper’s ideas will have to be strong enough to persuade property buyers that it is worthwhile paying its arrangement fees, even though other lenders have no fees and even pay cashback incentives to lure new borrowers. Bank of Ireland, for example, would pay €5,000 cashback to somebody borrowing €250,000, plus another €2,500 after five years. Pepper would charge the same customer an arrangement fee of €1,250 with no cashback.

Doddrell insists that borrowers seduced by cashback will lose out over time. “You can get cashback with Bank of Ireland but its rates are far higher than mine.” He also warns that the incumbents cannot rely on gimmicks such as cashback to protect their stranglehold on the mortgage market. “People who rest on their laurels — ‘I’ve got a third of the market, I’m invincible’ — will be caught out,” he predicted.

Taking aim at the big guns of Irish banking was not on Doddrell’s agenda in 2011 when his employer for more than 20 years, American financial services giant GE Money, dispatched the Englishman to Dublin to oversee the wind-down of its Irish operation. When Pepper bought the business the following year, Doddrell agreed to stay on as chief executive.

As well as entry to a new market, the investment gave one of Pepper’s Australian co-founders, Pat Tuttle, a chance to explore his family’s roots in Clare during his frequent business trips to Ireland. It also allowed him refresh an old friendship with Ray Wilson, a backer of Shamrock Rovers Football Club. The duo first met as young accountants at PricewaterhouseCoopers and their friendship has paved the way for Pepper’s sponsorship of the Hoops.

Doddrell’s decision to remain in Ireland involved relocating his family, including his three youngest children, to a country whose economy was in freefall in 2012. “It was an interesting time — to put it mildly,” he said. “From a career standpoint, when there are great opportunities, you keep going.”

These opportunities arose from Ireland’s battered banks, which were under pressure to either sell off their bad loans or to outsource them to specialists such as Pepper to clean them up. As the process gathered momentum, the company grew from €750m under management in 2011 to €18bn, while the headcount increased from 130 to more than 400.

“We knew there was going to be deleveraging in the Irish market but the level took us by surprise,” said Doddrell. “What accelerated the process was the liquidation of Irish Bank Resolution Corporation in 2013.”

Its loans were parcelled out among private equity investors, many of whom have outsourced the management of the loans to Pepper. It also took over the management of mortgages belonging to foreign lenders that have quit Ireland, including Danske Bank and the former Bank of Scotland (Ireland).

The process gave Pepper a crash course in the pitfalls of lending in Ireland. “Working through these credit portfolios gives us a real insight into how not to originate loans,” said Doddrell. “You get a good market awareness of difficult geographical regions and consumer behaviour. This helps formulate your thinking about a lending strategy.”

Based on what it has seen in others’ loan books, Pepper has decided to confine itself to lending on properties located in Dublin, the commuter counties, Cork, Galway, Limerick, Ennis and Shannon. Kilkenny was added to the list last week. It avoids financing self-builds because those building their own homes are more likely to breach planning regulations, compromising collateral for lenders.

While Pepper was surprised by the fast pace of deleveraging, the process has enraged many of those whose mortgages have changed hands. They believe that they have been abandoned to anonymous vulture funds, for whom Pepper acts as a front.

These concerns are misplaced, Doddrell insists. “Selling loan portfolios is not an event that happens only in Ireland; books have been sold in their billions across Europe,” he said. “The important message that doesn’t seem to be getting across is that consumers have the same protections [after their mortgages are sold]. We’re one of the largest providers of [resolution] options that borrowers might not get before their mortgages are sold.

“You might take the view that you’re going to get more options by being sold because the new owner is more prepared to do you a deal. If your mortgage is with a state-owned bank, it might not be able to offer so much flexibility.”

Some mortgages are beyond redemption, however. While this inevitably results in repossession in other countries, the Irish courts have been extremely reluctant to evict borrowers from their homes, even when their mortgages are hopelessly in arrears.

This explains why mortgages cost more in Ireland than elsewhere, according to Doddrell. “There’s a risk premium for operating in Ireland — adding somewhere between 1 and 1.5 percentage points to mortgage rates — because the enforcement process is not as clear or speedy as elsewhere.

“It makes it a real challenge to work out non-performing loans.”

Like other lenders, he takes a dim view of legislation currently before the Dail aimed at reducing the risk premium by placing a cap on the mortgage rates that lenders are able to charge. “I would see this as really negative. It puts people off if you dictate at what level they can play.”

Could the move cause Pepper to rethink its commitment to lending in Ireland? “If the legislation said rates could be no more than 2.75%, for example, I would have a problem. But I think every other lender would have a problem too. We’ll deal with the legislation as it comes in. You react and you adapt your business model accordingly.”

Tweaking the business model, though, could prove a lot trickier than touching up the company logo.

Vital Statistics
Age: 48
Home: Cornwall in the UK and Portmarnock in Dublin
Family: Married with four children
Education: BA (hons) in business studies from the University of Hertfordshire; ACMA-designated chartered accountant
Favourite book: The Big Scratch by Peter DiTomaso — Peter used to work for me
Favourite film: The Great Escape
Working Day
Depends on the day but usually I’m in the office by 7.30am and back home for dinner with the family around 7.30pm – always subject to the Dublin traffic
Time with the family, Formula One and a variety of sports, including Liverpool FC and rugby.