Page 32 - Bridging & Commercial Magazine Issue 5
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Zeitgeist   to be held against loans officially in default. Even when taking this into account, there are claims that some lenders have default rates that aren’t commensurate with the additional risk and associated expense. It is not just a simple case of buyer beware. The effect of excessive and callously enforced default interest rates has the potential to undermine the whole industry’s credibility. “If just a few lenders do it, then we’re all tarred by the same brush, which simply isn’t fair,” Mark explains. Following concerns from Financial Intermediary & Broker Association (FIBA) members and lender partners, Adam Tyler, executive chairman at FIBA, announced that it would begin publishing lenders’ default rates and terms in its lender directory. “It is all about transparency, to make sure the customers will come back to that broker again.” To further understand how prevalent the issue is, an anonymous B&C poll asked 100 brokers how often their clients have paid default interest rates over 3% per month. Some 43% responded ‘never’, 35% answered ‘sometimes’, while 22% claimed ‘often’. A few brokers and lenders suggest that the industry could move further forward with an industry cap on the amount of default charged. “I think this is fair for both borrower and lender,” says Paul, who adds that lenders with excessive default rates are not on Positive Lending’s panel. Mark suggests 2–3% per annum above the standard interest rate as the ceiling for any reputable lender. Out of 20 brokers we surveyed, eight thought that there should be a cap of twice the initial loan interest. I also asked the same sample about the defaults they had seen over the last 12 months. Out of those, there were just 11 cases where default interest was actually charged. However, it’s worth noting the contentious nature of the topic and that the proportion of defaulting borrowers being charged default rates could be much higher among brokers that did not take part in our survey. To put this into context, of the approximately 60 brokers we contacted, only 20 were willing to comment. A number of brokers claimed that they were usually able to negotiate alternative arrangements. Dale Jannels, managing director at Impact Specialist Finance, highlights that in one scenario in the past 12 months it managed to secure a grace period with a lender, which allowed the client time to come to a workable solution with minimal fees. Stephen Burns at Adapt Finance believes that this sort of arrangement should come with no additional cost. Paul adds that some of the lenders he works with don’t have default rates at all, just extension fees with the rate remaining the same. Colin Sanders, CEO at Tuscan Capital, explains the mitigating factors lenders take into consideration when default rates are on the cards. “This is where there is a grey area, where we are coming away from our contractual rights and really just looking at a pragmatic solution.” For it to work, he affirms that “all parties need to be on the same page to be able to apply that compassion”. Tuscan Capital sometimes conditions an extension on the proviso of having some involvement in the marketing of the property or being able to meet with the marketing property agent. When lenders aren’t so lenient, many brokers cite the spread of refinancing products available from other lenders. “ We will contact clients three months prior to \[the end of the term\] to ensure they are on the right track and, if they are not, we will look to see if we can help \[with\] the refinance,” adds Andrew. Adele Turton, director at Sirius Property Finance, shares this outlook regarding clients, but notes that bridging is usually used by “commercial people” (apart from regulated bridging) who have the requisite level of professional understanding. “As long as those fees are disclosed at the outset, then it becomes their decision.” Lenders with a long-term view don’t want borrowers to be charged default rates any more than brokers do. Colin explains that having a high number of borrower defaults breaches its covenants’ agreements with its private equity and institutional partners. “Our funding is not set up \[to\] have lots of loans in default. Our objective is to have a very low percentage of our portfolio to be in default.” Little standardisation in the market with regard to lender default fees could be one reason causing the issue. But even so, guiding and advising borrowers through the complexity of a loan is the role of a broker, and therefore brokers need to be asking lenders for clarity. Why is there a problem? Paul says that it is likely to be the result of bad practices by a few smaller, unregulated brokers. Michael Primrose, managing director at the Property Finance Guy, suggests that there is a “huge amount” of naivety from some brokers when discussing terms with customers. In addition, Ian Broadbent, director at Holme Finance Bridging Solutions, adds that there are cases where clients are overly optimistic about their exit strategies. Scott Marshall, managing director at Roma Finance, believes that brokers should be aware of lenders’ reputations for handling matters if a project does suffer delays, including their repossession statistics. There is a worry that inexperienced introducers won’t ask these sorts of questions. Colin believes it is often the result of brokers’ eagerness. “I have seen scenarios where brokers are keen to focus on the speed on the front-end pricing rather than the full terms of the contract.” But Adele claims that it is not always easy for brokers to comprehensively relay information, especially if lenders hide them in the small print. While industry discussion indicates that some lenders are operating with confusing default rates and policy, Adam speculates that many lenders will be clarifying their default policies in the lead up to the publication in FIBA’s lender directory. Mark suggests lenders will go further by lowering their default rates before FIBA publishes them. “ There’s nowhere for these lenders to hide,” he believes, “so it will be interesting to see if their terms change ... I’d like to think that the game is up.” Ian is concerned that lenders will simply transfer excessive charges on to ‘extension fees’ instead. I found that extension fees range anywhere from a £400 flat fee to £5,000 per month. Laura Kendall, marketing director at Funding 365, states that if the bridging industry is to fully shake off any lingering “shady” associations, it’s imperative that transparency to borrowers is made a priority by lenders. Among the lenders in the bridging space, there are a slew of different fees: arrangement fees, administration fees, title set-up fees, exit fees, early repayment charges, just to name a few. “At Funding 365, we make sure that all of our terms, rates and fees are made clear upfront in just two pages on our heads of terms,” Laura explains. “If individual lenders don’t work to best practice and, as an industry, we don’t somehow self- regulate, then we are much more likely to have regulation forced upon us, and I don’t believe that anyone in the industry really wants that.” While there may be a need for more standardisation when it comes to producing heads of terms, it’s unlikely that all lenders, particularly in a bespoke and innovative space, will all come to a formal agreement— especially if there’s potential for lenders to gain a sales advantage by not following suit and making their deals look more attractive. As Adam highlights, a sizeable proportion of bridging lenders are still not covered by FIBA. As long as the demand for borrowing is strong, unscrupulous lenders who are given business by, arguably, unscrupulous brokers will be able to make money. It is imperative that brokers ensure that they are aware of all fees the lenders they work with charge, how they are enforced, and clearly convey these to their clients—but isn’t that what commission is for?   30  Bridging & Commercial 

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