Some lenders charge between 1% and 3% as a default rate designed to cover the administration and additional time they are forced to spend recovering their security in the event of a default.
But Fincorp has warned that some lenders could be in hot water should they be found to be charging excessive amounts in penalty rates.
Nigel Alexander, director at Fincorp, said: “It is perfectly reasonable to put in place measures to cover our costs. But lenders should not be unjustly enriched by a borrower’s default.
“And there are bridging lenders, including some of the bigger outfits, which we understand are charging penalty fees as much as double or even three times the contractual rate.
“The fact that headline rates are dropping means lenders are being forced to find ever more ingenious ways to make a big enough margin to keep delivering returns to their investors.
“The exorbitant rates being charged look excessive to me. Even more so when you consider that there are lenders who will backdate those charges to the start of the loan, incurring an instant and considerable fee payable if a borrower goes over a six-month term by a day.”
In recent months unfair fees and charges have dominated the headlines. In June, payday lender Wonga agreed with the Financial Conduct Authority to pay compensation of over £2.6m to around 45,000 customers for unfair and misleading debt collection practices.
And just weeks ago it was revealed that 25,000 consumers have signed up to a Which? campaign to “stop sneaky fees and charges” after millions of people using unauthorised overdrafts complained that fees and charges were too high and unfair.
That campaign calls for an end to fees across the financial sector that are “hidden, excessive or make the total cost difficult to understand and compare”.
Alexander said: “Bridging lenders should take heed. Charging penalty rates that wipe out a borrower’s equity overnight could be seen as unfair and it’s exactly this kind of behaviour that is under a spotlight at the moment.
“All it would take is one borrower to take one lender to court or complain to the Financial Ombudsman Service or FCA formally, suggesting that penalty fees are unjustifiably too much. We could see the practice banned and, potentially, lenders being forced to pay redress or repay penalties charged in the past.”
And Alexander warned that just because bridgers deal with property professionals it is not a “get out of jail free card”
He added: “Buy-to-let lenders aren’t subject to the same regulation as residential lenders but they don’t go around charging these sorts of fees.
“Given how widespread the practice is within the bridging sector, it’s not too big a leap to entertain the idea that this could escalate and result in a legal precedent being set.
“While this could sound like scaremongering for the sake of it I genuinely believe it is our responsibility in the bridging industry to stamp out questionable practices such as this.
“We have an opportunity to set a benchmark; let’s not leave it to the customer, the lawyers or the FCA to force us to do the right thing.”
