News that the Financial Services Authority has clamped down on bridging lenders that use diverse methods of charging interest to consumers’ cost will shake the short-term market.
Let’s be clear, bridging isn’t a catchall term and the guidance from the FSA refers to regulated residential mortgage contracts.
But – and this is a big but – it will affect all regulated and unregulated bridging loans done by fully authorised and regulated bridging lenders.
That counts Dragonfly Property Finance, Lancashire Mortgage Corporation (part of Blemain Group), United Trust Bank, Cheval, Masthaven, Bridgebank, Affirmative, Precise Mortgages and Mayfair.
Omni Capital is also quite open about the fact that it is seeking regulated status from the FSA.
FSA approval has been the holy grail of the bridging market but with this revelation, that may change.
Not all bridging lenders have the same cost of funds and some that are backed by investment funds have higher cost of funds than bank funding lines for example.
If the FSA is rigid on its intention that all regulated bridging lenders must apply regulated standards across unregulated lending, then the consequent fall in retained interest income will be substantial for many lenders.
That will squeeze margins considerably.
News that the FSA also expects lenders to pay redress on loans sold to consumers who may or may not complain but who may have suffered as a result of overpaying retained interest will also have lenders holding their heads in their hands.
On a fairly average £390,000 bridging loan over an eight month term at a rate of 1.2% per month the interest differential between simple interest and retained interest is £1,872.
Now times that by the number of regulated bridging loans done since M-day.
The cost of reimbursing effectively mis-sold customers could be huge and will inevitably cripple some bridging lenders.
It may be that in order to survive some lenders abandon regulated status and go back to charging interest using the retained calculation.
While that’s an option it would set the whole bridging market back.
The FSA has said it is unfair to charge residential customers interest on interest before they require it – it stands to reason that it is also unfair to charge small business owners and property investors and developers in the same way.
Legal it may be but fair it is not.
Instead of seeing this as a threat the bridging industry would do well to take stock and use this starting pistol from the FSA as the impetus needed to get its house in order.
Many reputable lenders in the market offering both regulated and unregulated bridging loans do a valuable job providing development finance and short-term funding for Buy-to-let investors getting property up to scratch.
Bridging has a place in today’s mortgage market undoubtedly. It is often the difference between good deals being done and not done.
But the market has moved on and evolved to a self-proclaimed place of “professionalism”.
It is now time bridging lenders prove that value and professionalism by matching it with a self-imposed code of conduct which has to be led by the Association of Short Term Lenders.
As an industry too much emphasis is placed on regulation and not enough on good practice.
The regulator has now shown it is clearly not going to wait for self-regulation. But it is all the more reason for the industry to start leading the way in other areas that have been flagged as poor practice including overrides and charging arrangement fees on the gross rather than net loan.
Bridging can be better. Just how it can be better is still up for grabs.