Welcome to TLT's Busy lenders' monthly round-up. Each month we summarise the latest news and developments in retail mortgage lending and regulation.
This month in summary:
NEWS
Update: Cardiff City Council v Lee
In October 2016, the Lee case identified a requirement for permission to be obtained from the court before enforcing a suspended possession order.
Whether this requirement should be removed will be the subject of a new consultation (currently in draft). The issue of evidence showing a borrower's breach of payment terms when applying for a warrant will also be considered.
In the meantime, the temporary procedure for a statement of payments due and received to be submitted with the warrant request applies. The court can then see the borrower's failure to make the required payments and issue the warrant.
Longer term, the Rules Committee has suggested borrowers in breach of payment obligations should be treated as a special case.
Update: Onerous lease provisions
Last month, we reported how the Department of Communities and Local Government Secretary, Sajid Javid, had criticised developers for selling leaseholds where ground rent escalates to several thousand pounds over the course of the term. The Conservative's election manifesto repeats the promise to look into this area further.
In the meantime, Nationwide Building Society has announced it will refuse to lend where new-build leasehold properties have onerous provisions. The Society updated its part 2 responses to the CML handbook on 10 May to require:
- A minimum unexpired term of 125 years for a flat and 250 years for a house
- A starting ground rent of less than 0.1% of the property value
- A prohibition on rents which double every 5, 10 or 15 years
Other lenders may follow suit or await legislation to protect consumers.
Support for Mortgage Interest (SMI) Reduction
Last month, the Bank of England published data on the average interest rates for deposit and loan accounts in the UK. This showed the effective mortgage rate had reduced from 3.12% to 2.61%
From 18 June 2017, borrowers receiving SMI payments from the DWP will receive payments based on the lower 2.61% rate. So, a borrower with a £100,000 mortgage will see the support drop from £260 to £217.50 per month. This rate reduction may affect some borrowers' abilities to service their mortgage. Lenders should engage with these borrowers as soon as possible to discuss workable payment plans.
From April 2018 SMI will be a loan instead of a benefit and will be secured against the borrower's property. The DWP will shortly commence a communications strategy with benefit claimants. This is to ensure they are aware of this change and complete the necessary documentation to secure the payments against the loan. If a borrower does not engage with the DWP, the payments will cease at the end of March 2018.
Mortgage lenders need a strong voice in UK Finance
The CML has reassured members that they will not lose representation when the organisation merges into UK Finance, which is expected to happen in July this year.
The merger will combine six existing trade bodies: the CML, the Asset Based Finance Association, British Bankers' Association, Financial Fraud Action UK, Payments UK and the UK Cards Association.
CML director, Paul Smee, said that mortgage lenders will retain a "strong voice" in the new trade body. Mr Smee acknowledged mortgage lenders' concerns differed from other financial providers in a number of respects, including their reliance on intermediaries to distribute products across the market and the impact of local government policy on the housing market.
Whilst lenders will need UK Finance to continue to address these issues post-merger, Mr Smee did not explain how this could be achieved. We anticipate more information will be provided as we approach the UK Finance launch this summer.
First time buyers happy with lenders
The majority of first-time buyers are satisfied with their mortgage provider.
Data compiled by the CML shows that 87% of first time buyers were positive about their lenders, with some 30% saying there are "very satisfied". By contrast, just 1% report being "very dissatisfied".
Having analysed this data, the CML has concluded that borrower satisfaction has shown progressive improvement since 2014.
In particular, first time buyers rate their lenders' professionalism, helpfulness of staff and friendly approach.
An area identified for development was "listening to problems". The CML has concluded that borrower expectations around engagement and empowerment are increasing as a result of digital technologies, representing a challenge to lenders' customer services.
LENDING
Update: CML critical of 3% affordability
The CML has repeated its request for the Bank of England's Financial Policy Committee (FPC) to reassess the 3% mortgage affordability "stress test".
The CML considers the 3% test is unnecessary and has contributed to slower-than-expected growth in the mortgage market. It supports this position by comparing the FPC's 2014 forecasts for purchases per quarter at 270,000, with actual current activity standing at 205,000.
In addition, the CML cites static interest rates as a reason to relax the test, which it argues was instituted in 2014 to stabilise the market in the wake of anticipated rate increases.
However, the FPC appears unmoved by these arguments, stating that the test should be "hardwired" into the current regulatory requirements in order to provide greater stability to borrowers.
In response, the CML says that because a number of government initiatives intended to assist first-time-buyers and encourage growth have not gone to plan, the FPC should reassess its approach to regulation to encourage growth in the market. The CML believes that this can be achieved without any significant sacrifice in stability.
Second charges on the increase
Data published by the Finance and Leasing Association (FLA) this month shows a resurgence of second charge lending. The FLA's data highlight £93 million of second charge loans in March 2017. This equated to over 2,000 individual agreements (up 15% in value from March 2016).
The FLA confirmed this is the highest level of lending since 2008 – which could be signs of an early return of this important market.
REGULATORY UPDATE
Update: The Guardianship (Missing Persons) Act & The Homelessness Reduction Act
In the February round-up, we reported on the Guardianship (Missing Persons) Act 2017.
When a borrower is missing, data protection law and confidentiality obligations often prevent lenders from discussing the mortgage account with anyone else. The new Act is designed to address this deadlock by allowing a guardian to be appointed to run the missing borrower's affairs, including any mortgages.
The Act sets the framework for guardianship and more detailed regulations are expected within 12 months. Post 8 June 2017, the CML has offered to assist the newly elected government to ensure effective legislation in practice. Two key considerations for the CML are:
- the ability to check the status of a guardian through quick and reliable means; and
- a limitation on lenders' liability if a lender acts in good faith on a guardianship order which is no longer valid.
The Homelessness Reduction Act 2017 allows local authorities to consider tenants as homeless from the moment the tenancy is brought to an end. This means the tenant doesn`t have to be evicted before they will be eligible for housing assistance.
There is no guarantee that the next Government will produce the secondary legislation required to bring both these Acts into force. We will be monitoring developments with interest and will provide further updates in subsequent Round-ups.
Will the latest FCA review hit interest-only mortgages?
The latest FCA thematic review of interest-only mortgages has left many commentators discussing the long-term future of interest-only products.
The review will focus on how firms are treating borrowers with interest-only products approaching maturity, particularly those due to be repaid by 2020. It is driven by concerns that a rise in interest rates will push many borrowers into default.
Interest-only lending currently accounts for 1% of new mortgage lending from a pool of 27 lenders, a drop from 40% of lending spread across 80 lenders in 2007. The biggest decrease is in higher LTV (and therefore higher risk) lending. However, there are still 11,000 loans at over 75% LTV with less than two years left to run, hence the perceived need for a review.
CML data shows that half-a-million borrowers were contacted by lenders last year about their repayment plans. Of the 20% of borrowers that responded, 80% confirmed they had repayment plans in place. In addition, of the 300,000 loans not redeemed on maturity since 2011, less than 0.5% of cases end up requiring repossession, which is positive news for borrowers. Therefore, the interest-only book appears leaner and fitter
It is unclear whether the FCA's review will cause the market to shrink further, but the industry's view is that the interest-only sector is in good shape, and whilst lenders continue to engage proactively with borrowers it may well remain a viable option for borrowers.
PEER-TO-PEER
Peer-to-peer lending round-up
- Zopa has become the first of the big three marketplace lenders to obtain full FCA authorisation. In a statement, its chairman, Giles Andrews, said: "Zopa, both individually and as a founder member of the Peer-to-Peer Finance Association (P2PFA), has campaigned for peer-to-peer lending to be a regulated activity for a number of years. We are delighted to receive our full FCA authorisation." Zopa has also confirmed that it will now seek permission from HMRC to become an ISA Manager, so that it can offer Innovative Finance ISAs (IFISA).
- Funding Circle, another of the big three, has also just been granted full FCA authorisation. It also confirmed its plans to offer the IFISA later this year. Funding Circle has become the largest marketplace lender by cumulative amount lent, with investors having lent more than £2.3 billion to date.
- The authorisation of Zopa and Funding Circle follows FCA approval being granted to a number of smaller lending platforms over the last six months including Folk2Folk, Landbay and LendingWorks. Also in the last month, Linked Finance, the largest Irish peer-to-peer platform, and ArchOver have been granted FCA authorisation.
- Despite the wave of recent authorisations, new FCA regulation proposals of crowdfunding have been delayed by the general election. AltFi.com reports they are now expected in the summer.
- Finally, MarketInvoice, the invoice financing marketplace lender, has announced significant growth in the first quarter of 2017. According to AltFi.com, the platform has grown the volume of its business by 60% in this period. The sector more generally continues to see strong growth. The trade body P2PFA released a statement last month announcing cumulative levels of lending have reached nearly £8.5 billion, with P2PFA members facilitating more than £1 billion of lending in the first quarter of 2017.
FOCUS ON SCOTLAND
The enforcement of assigned standard securities
There have been two important decisions in the Scottish courts in recent months which have implications for creditors pursuing possession proceedings based upon assigned securities. Unhelpfully the decisions are contradictory and leave this area of the law in a state of uncertainty pending the issue being clarified by an appellate court.
In OneSavings Bank plc v Burns, OSB having acquired title by assignation of a standard security, sought an order at Banff Sheriff Court for possession of a residential property. The borrower successfully challenged OSB's title as the wording used in the assignation did not conform to the required statutory form; it did not specify the balance due at the time the standard security was assigned.
In Shear v Clipper Holdings, an application for interim interdict (injunctive relief) was made by a borrower seeking to prevent a creditor, which had acquired title by assignation, from enforcing its rights. The assignation was in similar terms to the style used in the OSB case. The borrower relied on the decision in OSB in challenging the creditor's title.
In refusing the customer's application for interim interdict, Lord Bannatyne did not follow OSB. He considered that to do so would result in an unjust outcome and would not give effect to the statutory purpose of assigning an all sums due security.
Like Sheriff Mann in OSB, Lord Bannatyne was sitting as a judge at first instance. Both decisions are therefore persuasive and not binding upon other courts. The decision in Clipper is nevertheless a decision of a Lord Ordinary and is likely to be more persuasive than the decision in OSB.
A more detailed analysis of the implications of these decisions can be read here.
Royal Bank of Scotland plc v Mirza (2017)
Lenders will be familiar with the pre-action requirements introduced by the Home Owner and Debtor Protection (Scotland) Act 2010. Compliance with these requirements is mandatory where the lender plans to commence action for possession of a property which is used, to any extent, for residential purposes.
The recent decision of the Scottish Appeal Court in Royal Bank of Scotland plc v Mirza considered when a property is "residential".
In this case, the Sheriff followed the approach in Westfoot Investments Ltd v European Property Holdings Incorporated (2015). It was held the protection of the Act is only afforded to borrowers "for whom the security subjects were their home".
In Mirza, the borrower had a buy-to-let mortgage on a tenanted property. Additionally, the borrower did not claim that he occupied the property at the time of service or expiry of the calling up notice. Consequently, the court held that the standard security could be enforced - the pre-action requirements, in this case, were not mandatory.
Whilst on the face of it this may appear to be a favourable outcome for lenders, the decision was specific to the circumstances where there was a buy-to-let mortgage in place and the borrower clearly stated that the property was not his main residency. Whether a property is used for residential purposes is a matter of fact and lenders must consider the facts of each case. Additionally, lenders should err on the side of caution before commencing action without complying with the pre-action requirements as it is unclear how the court may respond in the event the borrower reinstates the property as his/her main residence at any stage during the proceedings.
Contributors:
Ben Hanham
Luke Austin
Sam McCollum
Michael Seddon
Duncan Martin
Emma Finch
Catherine Zakarias-Welch
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
