Time to set the record straight on short-term lending
How bored are you of hearing about bridging in relation to two things only? Apparently it is “full of shady practice” and people are forever asking “shouldn’t it be regulated?”
My colleagues and I have been in the short-term lending sector for 25 years and I am fed up of hearing both of these frankly over dramatic claims levelled at bridging. It is high time someone set the record straight.
It would be naïve to suggest that bridging is whiter than white – clearly there are examples where bridgers have been caught red handed charging exorbitant fees and calculating interest payments in unnecessarily complex and convoluted ways.
But fundamentally the short-term sector is a good thing. It provides finance fast. It provides finance to professional property developers in the main who can see a commercial opportunity and need to act quickly to take advantage of it. Critically – it provides finance, something the banks are still dallying around, umming and ahhing until the deal is off the table.
This is where I think the debate has taken a wrong turn. Bridging itself is no more in need of regulation than buy-to-let. The vast majority of bridging – or short-term finance more accurately – is a commercial decision, albeit in the residential property market. These are experienced landlords and property developers looking for reliable and fast finance to fund commercial projects. Regulation is only helpful when there is a consumer to protect – and 95 per cent of bridging is business.
The Financial Conduct Authority is only able to comment publicly on areas of the market that are regulated and I think it knows that in the bridging market this equates to around 5 per cent of the business done.
That is why it talks about customers being wrongly or inappropriately put into bridging loans where they should have a regulated mortgage – because that falls inside its remit. But in fact, it is the professional standards in the unregulated sector that we all know need to be addressed.
My suspicion is that the regulation debate continues to rumble on because the FCA has no jurisdiction in the unregulated space – yet it knows that behaviour must improve. At Fincorp, we agree. It is perfectly possible to be part of an unregulated market with stringent, moral and professional standards of behaviour overseen by a strong trade body.
There are several examples of successful self-regulation including pre-mortgage day in 2004 when the Council of Mortgage Lenders ran the voluntary mortgage conduct code and mortgage lenders adhered to it.
The buy-to-let market is a brilliant example of a self-regulated market that operates healthily without instances of borrowers being fleeced. Bridging is capable of following that example. The Association of Short Term Lenders is beginning to get there with its value charter that demands professional standards from its members.
But there are still too many instances of some lenders tying their borrowers up in opaque paperwork, others charging exorbitant rates of interest, penal rates of interest being applied back dated to the start of a loan if it fails to repay on time and those still charging sky high fees and then pulling out of doing the loan last minute.
This is all very bad practice. And I think it is that which has us all hung up on regulation. The ASTL can and must do more to address instances of poor transparency.
We have all heard about interest charging – different lenders, different methods, compounding, rolling up, and charging interest on the interest. One option could be to use APRs to reflect true cost. However in my view, for loans under a year APRs can be just as misleading.
No, what we need to do is make things clear and simple. At Fincorp, we don’t charge fees and we do charge a flat monthly rate. We don’t expect everyone in the market to follow our example – that wouldn’t be competitive for the borrower at the end of the day – but we do think setting out your stall and sticking to it is vital.
The ASTL needs to be more specific about what is and isn’t acceptable in terms of customer charges and backdating charges. It must also widen its scope – too many lenders are not members and continue to flout good practice. It has begun to work on this sort of behaviour standard through its charter. But as an industry we still have a long way to go.
Getting to a point where we can stop banging the regulation drum is a matter of getting to a point where we all behave in a way that doesn’t require regulation to stamp out bad practice. We are on that path – we just have to commit to it and ostracise those who don’t.
Lloyds right to link proc fees to quality
Last week Mortgage Strategy reported that Lloyds Banking Group will begin linking the procuration fees it pays brokers to the quality of business submitted from the beginning of next year on its BM Solutions and Halifax brands.
The group will begin telling brokers what metrics it will use to measure quality by the end of the year.
The quality debate will rumble on well into Mortgage Market Review next year and the usual anonymous contributors will be spitting their dummies, yet both lenders and brokers need to embrace the issue together.
Lloyds’ idea to link proc fees to quality makes sense as in theory those who introduce better quality may receive higher proc fees.
It is down to any lender adopting this approach that they have sufficient management information to reward each individual firm with better fees in return for quality.
It should not be one uniform fee per network because we well know it only takes a few ‘bad apples’ in a network to lower quality standard overall.
Furthermore, brokers who do introduce excellent quality business should be reward with experienced contact staff who can handle cases efficiently.
As I have written before in Mortgage Strategy, post-financial crisis underwriters are still learning, as many are still new to the role. Sadly all the experienced underwriters got pensioned off in the boom when most cases were going straight through on an electronic nod.
Networks also need to play their part to ensure their sales processes are robust enough to meet the post MMR world.
Human touch is the only way
Underneath the story on Mortgage Strategy about Lloyds Banking Group’s decision to link proc fees to the quality of business submitted to them there were a number of comments criticising the amount of time brokers waste when their cases are managed poorly by lenders.
With regards these service issues, they are occurring even before it even gets to an underwriter.
There is no standardised procedure or common sense employed before the legendary pre-underwriting sign-off.
Therefore, interpretation of how a prospective borrower’s pay slips and earnings can be broken with each lender varies dramatically.
Poorly trained staff and useless IT systems which have cost thousands of pounds simply do not work. Human interaction is the only way.
A massive well done to Hodge
Retirement solutions provider Hodge Lifetime last week launched a new lifetime product aimed at borrowers entering or in retirement.
The retirement mortgage is an interest-only lifetime loan which does not require capital repayment until the borrower dies or moves permanently into long-term care although customers must pay the interest each month.
The initial rate of 4.75 per cent is fixed for five years after which it moves to a standard variable rate. After the initial five years, the loan can then be repaid with no early repayment charges.
A massive well done to Hodge on this. As a sector we need to focus on customers’ needs and clearly in a lot of cases the need of secured funding is not going to be met by a roll-up lifetime loan as affordability is there.
In fact, I would go as far as to ask how many lifetime Safe Home Income Plans/Equity Release Council approved loans have been sold in recent years to clients who clearly had the ability to pay interest but were never offered that as a product option.
Is this misselling again?
The fact is that as a sector we must ensure clients are aware of all their funding options, and then ensure they know the positives and negatives for each product.
What use is the negative equity guarantee and right of tenure etc to a self employed pensioner with a good pension income but the bank is wanting its mortgage money back even though the client happily pays the mortgage each month?
Likewise a client who cannot afford payments may well be suited more to a lifetime product.
The adviser community must embrace a more holistic understanding of customer needs and the products available to meet these needs.
Hodge’s product is not suitable for everybody, but no product is. It is our job to match the solution to the need. Well done to Hodge!
A product for those who can afford it
The mortgage market is crying out for innovation and Hodge Lifetime’s product is catering for those with a need for an interest only option…& there are many!
Significant retirees have experienced & managed debt throughout their lives & lenders recently have reigned in this option for no apparent reason. Roll-up is NOT suitable for everyone.
The Hodge Retirement Plan can therefore fulfill those peoples needs where they have the ability to manage the monthly payments, now & in the future.
Again, thought has gone into the opt out strategy and this product should only be taken up by those who can CLEARLY show affordability. Simple.
This is where sound financial advice is required.
Redress is an occupational hazard
The Financial Conduct Authority last week revealed that it planned to carry out a review of complaint handling in banks and building societies, placing greater onus on the role of senior management.
In a speech at a Building Societies Association event this morning, FCA director of mortgages and consumer lending Linda Woodall said “something isn’t working” in the way firms manage and investigate customers’ complaints.
She said the regulator will undertake a review of complaint handling and management in major firms.
Sadly, I think many banks see compensation payments to customer and fines from regulators as (in the words from Porridge) “an occupational hazard”.
It cannot be right that some banks get the same level of complaints (excluding say payment protection insurance, etc) each year and they do not change their behaviour.
Banks should be striving for 100 per cent satisfaction and they would never spend money on fines or advertising.
The exceptions would be say First Direct, Metro and the small building societies.