The exponential growth in bridging lending has been fuelled by four factors, all of which increase the risk of mis-selling:
- The tightening of main stream lenders lending policies has created the opportunity for secondary lenders to develop a suite of short term products where a higher rate of interest are charged, giving better returns to investors, for an increased risk.
- The potential return, being greater than mainstream lending, has in some cases led profit driven lenders to enter the market and exploit those desperate consumers to borrow.
- Brokers do what brokers do – when faced with a customer requiring assistance with funding they provide a solution from wherever they can.
- The broker remuneration [commission] paid by bridging lenders is usually higher than that from mainstream lenders.
Previous warnings have gone unnoticed!
Regulator’s concerns about the growth in bridging lending have been raised before. The former regulator [the Financial Services Authority – FSA] used a key note speech at the London Mortgage Business Expo [a conference for mortgage brokers] in 2011 to warn brokers that they should not be tempted into offering bridging loans when such loans were not appropriate to customer needs. The FSA ‘flagged’ two concerns. The FSA suggested that some brokers were finding “imaginative” uses for bridging, such as offering it to customers in financial difficulty or as a substitute for a traditional mortgage, without thinking about an exit strategy and that some lenders, not regulated by the FSA, were offering bridging deals on properties that were residential and which should have fallen under regulated business. Where such behaviours exist there is a significant risk of consumer detriment.
What is the FCA now consulting on?
The FCA has issued a consultation paper which has the innocuous title “CP13/2 – Mortgage Market Review – Data reporting”, but the paper suggests fundamental changes to this area of business. The FCA aim to improve the quality of data that they receive in respect of bridging loans, to help them better supervise the sector. The FCA state, “This is particularly important given the growth in this sector over recent years, and ongoing concerns about conduct.” The FCA proposes to include additional data capture so that they can more clearly identify bridging loans, their characteristics, and the types of consumers who take out bridging finance. They propose to capture whether a mortgage is a bridging loan through the ‘mortgage characteristics’ field. A separate field will capture whether interest is rolled-up and a new data field that will allow the FCA to collect data on the term of bridging loans (in months).
The greater focus will help prevent the risk of consumer exploitation!
Although mainstream lenders are relaxing lending criteria, and some might say the bridging mis-selling horse has already bolted, the more robust data capture regime will help prevent future market abuse by those prepared to turn a profit by exploiting desperate customers.