Bridging lender Fincorp has claimed that those short-term lenders who charge clients a large fee when the term of a loan is extended could be falling foul of Mortgage Market Review (MMR) rules.
The firm 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.”
This follows a warning from the Association of Short Term Lenders (ASTL) 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, then said: “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.
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”.
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.”