Since the secured loans industry became regulated by the Financial Conduct Authority there has been some concern that the industry would lose its edge.
It is not difficult to see where these fears originated. When the Mortgage Market Review was first mooted, many lenders were guilty of overreacting, tightening affordability criteria to an unnecessary extent and making their offering so vanilla there was little innovative thinking in sight.
Understandably there are some people in the industry who think the secured loans sector could lose some of its edge and become stifled by regulation once the sector is taken under the FCA watch in 2016.
Is this going to be the case? No, I do not believe it is. Firstly, I do not believe secured lenders will overreact to FCA regulation in the way mortgage lenders have. Secondly, many secured lenders and brokers are already working with MMR in mind. And, thirdly, most secured lenders consider individual circumstances on merit.
Let me be clear – this is by no means a bad thing. I simply mean to make the point that a lot of secured loan lenders and brokers are already some way ahead in their FCA thought process but their attitudes and scale will allow them to remain nimble and innovative.
There is speculation that second charge lenders would have to address their affordability calculations and that this would lead to the sector losing some of its bite. However, many lenders have already made changes and prudent master brokers are also carrying out their own income and expenditure checks and applying stress testing behind the scenes.
Historically, the affordability calculation for a secured loan has not used traditional multiples seen in the mortgage market. Instead we have taken in to consideration borrower outgoings and credit commitments so the stretch to consider actual/reasonable household outgoings and to apply a “what if rates change” mindset is not a huge leap. It is common sense.
Perhaps the unseen downside is that it is now more difficult for a broker to identify and advise on a product without applying each lenders detailed affordability calculations. Previously a broker would know at a glance which lenders’ affordability model a case would fit. It will be interesting to see how advice models change to cater for potential abortive work and the need to re-quote when the first lender declines on affordability. Both first and second brokers will face this chicken-or-egg problem and I expect technology will provide a solution allowing multiple income DIP’s to be carried out simultaneously.
The bigger question is whether the increased profile and, therefore, increased business within the sector could mean the industry will not be able to offer a more bespoke service than its mortgage market counterpart. While I can understand concerns about this I do not think there is any danger of this happening as long as lenders are utilising experienced packagers.
The secured loan market has always adopted a bespoke approach to lending. While some may argue this can lead to inconsistencies and an unreliable process, in reality it also leads to better outcomes for the borrower. Customers do not always conform to a tick-box approach and, as secured lenders have the advantage of not being huge volume producers, they are able to take a more personal approach to applications on a case-by-case basis.
This has always given them an advantage over mortgage lenders, which in the past have been criticised for not allowing brokers access to underwriters. Of course, one can understand why they don’t. We are talking about an industry with around 10,000 brokers wanting to talk to an underwriter about their cases. Employing a personal approach when dealing with these enquiries would be impossible.
While some second charge lenders are adopting an automated underwriting process, they generally share with their master broker/packagers where loans outside normal criteria could be considered on a referral basis.
Lenders which primarily deal through master brokers automatically reduce the volume of calls. Furthermore, those calls that do come in should come from an experienced packager which deals with that lender on a daily basis.
As long as lenders continue to align themselves with trusted master brokers who understand the industry and know what they are doing, they will be able to maintain their bespoke service by using the master broker/packager as a filter.
Where most first charge lenders may be akin to oil tankers, there will always be second charge speedboats reacting faster and offering a more personal, bespoke service which will maintain the service and flexibility edge over first charge mortgages.