Secured lending is a compliant environment for the intermediary, explains Stephen Lawrence, group national sales manager at Norton Finance UK Ltd
Since 5 March 2009 the Bank of England Base Rate has remained at a record low level of 0.50% and as a consequence many borrowers still have a low cost Standard Variable Rate on their mortgage account.
However because inflation has increased and salaries in many cases frozen, family budgets are now being squeezed and as a result many borrowers need to reduce their monthly outgoings by consolidating any debts.
With unsecured credit not being readily available from lenders in the High Street borrowers are approaching Intermediaries to provide a solution to their debt problems.
In the past a remortgage would be the obvious solution for debt consolidation, but as a result of the often low cost charge rate on the existing first mortgage, and reduced loan to value on the remortgage products available in the market, intermediaries (where suitable) are now recommending an alternative solution to their clients: a second charge secured loan.
The main reasons why intermediaries select a second charge secured loan as a debt consolidation solution are:
* Retains the low interest rate on the existing first mortgage account
* Consolidates any debts into a single monthly payment
* Provides loans up to 85% Loan to Value at terms up to 25 years
* Does not normally involve solicitors and associated costs
* There are no upfront fees paid by the borrower
* Products available both for prime and adverse borrowers
* Early Repayment Charges only a maximum of two months’ Interest (zero with some lenders)
However to many intermediaries second charge secured loan products are still mysterious, being regulated by the Office of Fair Trading (OFT) under the 1974 Consumer Credit Act, and therefore many feel more comfortable introducing borrowers to specialist finance brokers who have an extensive secured lender panel and expertise to process this type of loan from application to completion.
In the past how an Intermediary has selected a specialist finance broker from the marketplace has been influenced by some or all of the following items:
* The advertising material received on products and services
* The secured lender panel available
* The company reputation in the marketplace for speed and loan processing efficiency
* The commission structure paid on completion
* Through recommendation from another intermediary
* The ease of submitting a loan application
* The facilities offered to case track loan applications
* Because of a reciprocal business arrangement
Some of these items are still important, but going forward Intermediaries should satisfy themselves that any specialist finance broker they use for loan applications comply with any compliance regulation or guidance notes that are issued by the OFT. Failure to complete this exercise could have a detrimental effect on their professional reputation with clients in the future.
The guidelines on irresponsible lending issued by the OFT in 2010 sets out the procedures required by specialist finance brokers who process and package second charge secured loans. In particular the specialist finance broker must verbally disclose the following information to each borrower:
* Explain about the consideration period to the borrower(s)
* Inform the borrower(s) that if there is anything they are unsure about regarding their loan they should always obtain independent legal advice before signing the loan credit agreement.&’8232
* The packager must ensure that all borrowers are aware of any Broker Fees at the outset.&’8232
* It must be made clear to the borrower(s) about charge rates. If charge rates are variable it must make this clear to the borrower(s) that payments are not fixed throughout the term and therefore payments may change.&’8232
* Affordability is a key issue when assessing a loan and a packager must ensure that the borrower(s) can afford the repayments. The borrower(s) need to be made aware of the importance of keeping up to date with their repayments and the consequences of missing payments.
The new guidelines place a major responsibility on to the specialist finance broker to provide clear and transparent information to the borrower(s) so that they fully understand the loan process and the features and benefits of the loan product being offered.
Failure to comply with these guidelines could result in:
* The Consumer Credit Licence of the specialist finance broker being revoked
* The intermediary who submitted the loan application receiving a serious complaint from their client
To prevent any complaints an intermediary should satisfy themselves that any second charge secured loan applications submitted to a third party are processed correctly and that the irresponsible lending guidelines are being followed. To provide this proof at Norton Finance, one of the largest finance brokers in the UK, we tape all customer telephone conversations and have a loan processing system that provides an audit trail on the secured loan product selected. This information is shared with our business partners and provides the necessary comfort to them in this very compliant marketplace.