The classification of a bridging loan as less than 12 months is just one detail that may catch out the unwary
The majority of the bridging industry is not expecting to be affected by the Mortgage Credit Directive. However, there is a chance that it will be.
Of course, the MCD applies only to loans secured on property that is, or can at any time be, occupied as a dwelling by the borrower or a related person. This includes property owned by ‘consumer landlords’.
For the purposes of the MCD, a bridging loan is classified as a loan that is of no fixed duration or is repaid within 12 months. The loan must be used by the consumer as a temporary financing solution while transitioning to another financial arrangement.
However, if, for any reason, the loan is extended to a date more than 12 months from the starting date, it will fall under the remit of the new legislation.
At this point, it will be necessary to issue the client with the European Standard Information Sheet. It may also mean that some lenders will no longer be prepared to offer regulated bridging loans for a development situation because these could require an initial period of more than 12 months or could have to be extended.
Under current rules, any extension that differs materially from the existing loan requires the same processing as a new loan.
While it was theoretically possible to produce KFIs for regulated mortgage contracts, most firms invested in computerised systems. With this in mind, switching to ESIS documentation will not be cheap.
There is more in the MCD than first meets the eye. The classification of a bridging loan as less than 12 months is just one detail that may catch out the unwary.
Benson Hersch is chief executive of the Association of Short Term Lenders