MMR: FSA clamps down on bridging
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The Financial Services Authority is to ban speculative bridging loans and those with a term of more than 12 months in a radical overhaul of the market.
In its final consultation paper of the Mortgage Market Review, the regulator says lenders should not accept speculative methods of repayment for bridging loans.
These would include an expectation on behalf of the borrower that the bridging loan would repair their credit status enough to refinance to a mainstream mortgage, unless the lender has evidence of a guaranteed offer.
The MMR paper says bridging lenders will be required to have an interest-only policy in place which clearly states which short-term exit strategies it considers to be credible.
Furthermore, the FSA says it will redefine a bridging loan as a regulated mortgage contract with a term of 12 months or less.
The regulator also reveals in the MMR paper that it has a number of concerns about the bridging market, including a fear that bridging products are being inappropriately targeted at vulnerable, credit-impaired consumers, with promises the loans will improve their credit scores.
The FSA says it is also concerned about:
- Whether it is appropriate for bridging finance to be used as a means of repaying mortgage arrears, particularly for vulnerable consumers facing repossession.
- Whether bridging finance is being offered as a last resort where mainstream finance is suitable.
- The extent to which regulated business is being reported inaccurately as non-regulated loans.
- The quality of lender underwriting practices, both at the time the loan is advanced and, where applicable, where the loan is extended.
To mitigate some of these concerns, it will be requiring brokers to determine why a mainstream mortgage was not suitable for the customer as part of the bridging sales process, and forcing lenders to reassess customers’ ability to repay their bridging loan every time its term is extended.
The MMR states: “We are concerned that lenders may be extending the term of the loan when, in reality, the chance of the consumer being able to repay the second time around is no greater.”
It says data from the Association of Short Term Lenders shows that 33% of bridging lenders’ loan book has been extended.
ASTL figures also reveal that regulated bridging’s share of the overall mortgage market has fallen from 0.03% in 2007 to 0.02% in Q2 2011, while non-regulated bridging business has doubled over the same period.
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