News & Views

Bridging extension fees could contravene MMR

Bridging lenders that slap clients with a large fee when the term of a loan is extended could be falling foul of Mortgage Market Review rules. Bridging lender Fincorp has warned that any conversations between bridging lenders and borrowers directly run the risk of straying into regulated advice, particularly if the borrower is facing having to extend their loan and the lender offers both regulated and unregulated products.

Nigel Alexander, director of Fincorp, said: “Most bridging falls outside the parameters of MMR and most lenders deliberately deal through brokers to avoid getting into any advice scenarios with clients directly. But the nature of bridging means that sometimes borrowers need to extend the term of their loans – and in the past that is a conversation that could have happened between the borrower and lender.

“The risk in a post-MMR world is that this conversation strays into advice from the lender because the client is quite likely to ask what their options for extending the loan are – it’s an especially grey area if the lender offers different ways of calculating interest charged on extension fees and if the lender is offering both regulated and unregulated loans. If the lender tells the client they can extend the loan and then the client realises that interest will be charged back-dated on the full term of the loan, there could be all kinds of difficult regulatory questions raised about responsibility.”

Mr Alexander’s comments follow a warning from the Association of Short Term Lenders issued earlier this year, cautioning bridging lenders to be on their guard against straying out of execution-only sales and into advice. Benson Hersch, chief executive of the ASTL, said at the time: “It will be complicated not to give advice and not to be seen to have given advice. Whilst making it clear to a client that they are not receiving advice for their extension of time – or anything else – the lender will also need to make them aware of the protections that they will lose by going down this route. They will then need to underwrite the fact that the client has confirmed that they are happy to lose these protections.”

Although unregulated bridging currently falls under Consumer Credit regulation and is exempt from the same rules governing regulated mortgage contracts, the supervision of this transferred to the Financial Conduct Authority in April this year.

Mr Alexander said: “It is going to take time for the regulator to get all the bridging lenders, not to mention other CCA lenders, through the registration process, but when they have done we think it likely they will look at this sort of thing. It’s something responsible bridging lenders should be ahead of the curve on.”

Under the existing MMR rules there is an exemption for variations and extensions of loans which allow conversations between lender and borrower to be considered “execution only”. The ASTL has issued guidance for its members suggesting that every lender will “need to document clearly if they have had any communication with a client and the client has chosen not to take advice”.

Mr Alexander added: “We believe that as this develops, we are likely to see less scrupulous lenders that charge extortionate extension fees come under pressure to ditch them. It will become increasingly obvious to clients that they’re paying through the nose for fees that other lenders don’t apply.

“That would be a very welcome outcome for the market as there are still far too many hidden charges for borrowers. But the upshot would be that headline rates would be likely to rise however as lenders will have to cover their costs in other ways.”

This old boy is worried about the block

By Matthew Anderson, director of Fincorp

One of the advantages of having a few grey hairs is having the experience to know how to read signals. In the short-term finance market this is particularly useful. Lending money is easy; it’s getting it back that’s the hard bit. Over the past three years bridging has really exploded – we’ve gone from a market under a billion pounds of gross lending a year to, some estimate, closer to £2 billion. Doubling the size of the market in three or four years under any circumstance is impressive. In an economy that has been only very slowly returning to recovery mode, it should be ringing some alarm bells.

Let me recap: short-term finance, in all its many and flexible formats, comes back to one basic principle, money at a price for a short period, secured on property. Bridging is not a long-term solution – it’s a quick and flexible fix suitable for professional property players who understand the commercials. The reason it’s seen an explosion in popularity is two fold: the high street banks stopped lending on anything other than vanilla deals in the residential, commercial and buy-to-let markets leaving a gap for bridgers to fill; and, with interest rates static at 0.5 percent since March 2009, investors have been hunting for yield.

Bridging fulfils both sides of the equation. Without it, small-scale residential developments, auction purchases and refurbishment projects would have been left undone. Investors have also reaped good returns, in the region of 10 to 15% annually – a far cry from high yielding bond rates around 6%. And they have the security of an asset underlying the transaction.

But those grey hairs and years of experience lending in this market are telling me to think twice about the success of bridging.

At the same time as we have seen the market more than double, we’ve seen a number of new players enter the market – from mainstream residential mortgage lending backgrounds, mortgage broking backgrounds and several from packager backgrounds. A diverse market place is a good thing for everyone – it encourages competition, drives up standards and drives down pricing for borrowers. These things are welcome. Less welcome is the mad dash for market share. This, I worry, is having the opposite effect. Rather than driving up standards, it could be encouraging laxer underwriting by some less experienced lenders.

It also seems to be encouraging some lenders to come up with ever-more ‘clever’ ways of selling their wares. It was ever thus that brokers and borrowers alike are seduced by low headline rates, and don’t seem to fully appreciate how large fees can contribute to the overall cost of a loan. The market is seeing rates come down month after month, and meanwhile, fees are edging up. Three years ago, lenders charging an arrangement fee charged 1%, used to pay the broker in the transaction. Recently I’ve noticed up front fees around 2%, and sometimes more.

Where is the customer in all of this?

Being an old boy on the block may, as some levy against us, mean we stick to our guns on criteria, the deals we’ll consider doing, and on our insistence that we won’t charge fees. It means our rates appear higher than others out there in the market – but as mentioned, that’s because we don’t charge fees. The cost to the borrower is often the same or better.

But being an old boy also means, frankly, we’ve been around the block – several times. Fincorp has weathered three severe property recessions. We’ve been lending short-term money to property professionals for more than 25 years. I know a market running away with itself when I see one. People are piling into bridging because they see a quick buck. The problem with quick bucks, is they are rarely sustainable.

Experience matters. I fear that our market, which has several very professional and experienced lenders in it, has become riddled with people out for themselves. There is increasingly too much money going to too many people in the chain. Being an old boy on the bridging block means I care that an overcrowded market competing too savagely for business, that frankly shouldn’t be done, doesn’t bring the block crashing down around our ears.

Bridging offers value to customers and value to the health of the property market more generally. We must be careful not to wring it within an inch of its life.

Misleading advertising undermines bridging professionalism

Some bridging lenders are deliberately luring borrowers into low monthly interest rate loans that end up costing them thousands of pounds more than they anticipated when fees are slapped on top, Fincorp has claimed.

Nigel Alexander, director of Fincorp, said he fears the increasingly competitive market for bridging is “pushing lenders to compete more desperately” with lenders claiming they’ll offer rates “from” lower and lower levels, but they can’t and don’t deliver in reality.

Alexander said: “We are increasingly concerned that brokers are being seduced by headline rates that are simply there for show. Most lenders aren’t actually agreeing deals at the rates they’re advertising but brokers and clients are being drawn in. The problem, in our view, is that some of these lenders then agree terms that are too short to be appropriate for the deal, clients default on the original terms and then they’re left facing penal rates of interest, default fees, and extension fees – often up to 2% a month, and in some cases backdated to the start of the loan.

“This is bad for consumers and should be a cause for concern.”

The claim follows the latest figures from the West One Loans bridging index that showed on a bi-monthly basis, bridging interest rates averaged 1.19% between 1 January and 1 March 2014. This was slightly higher than was seen in the final two months of 2013, when the average interest rate had reached a low of 1.11%. However, interest rates remain significantly lower than a year ago. Average monthly interest rates were 1.19% over the 12 months to 1 March 2014 compared to 1.34% per month over the previous 12 months.

Some lenders now advertise monthly rates from below 0.7%.

Alexander said: “In many ways competition has been fantastic for the bridging market, driving up standards, increasing professionalism and encouraging more money into a sector that provided much needed funding for property professionals but which had been abandoned by the high street banks. But we are sensing that competition is getting ever more fierce this year and it’s causing lenders, who need to lend their investors’ cash to generate returns, to get involved in a deal grab.

“Ultimately, though, they can’t generate the returns their investors want and need by honouring the interest rate they promised borrowers and brokers to get the business through the door – they’re relying on the borrower needing to extend the loan and pay through the nose – but by then, they’re sitting ducks.

“It’s not good for the industry or for customers to let it go down this road.”

Following supervision of consumer credit transferring to the FCA in April, the FCA suspended Amalgamated Finance Limited’s regulated bridging permissions pending the lender complying with the regulations. One of the terms in the FCA’s notice made reference to the firm’s failure to adhere to the “requirement not to oblige the debtor to pay increased interest on default under section 93 CCA”. It found that “no debtor is liable under any contract for default interest claimed in contravention of the requirement in section 93 CCA (having regard to section 173 CCA)”.

Alexander added: “The sad truth is some bridging lenders are relying on default interest to fund their investors’ returns by hoping borrowers need to extend loan terms. We see borrowers suffering the fall out and know it’s happening.” Gross bridging lending hit £2.02bn in the 12 months to 1 March 2014, an increase of more than 26% compared to the previous 12 months, according to West One’s figures.