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Busy lenders' monthly round-up February 2017

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

Lending


Regulation

Digital

Peer-to-peer

News

Legal help for customers at possession hearings

Free legal advice from a duty solicitor is generally available at possession hearings nationwide.  Currently there are 117 schemes funded by the Legal Aid Agency.  

The Government is concerned about sustainability in light of a number of providers withdrawing services. Changes are planned to make the work more rewarding for lawyers, with a remuneration arrangement in the pipeline. However, there is a concern that a price war may affect the quality of the advice provided.  

From a lender's perspective, it is beneficial that customers are properly advised as this may help determine the most appropriate outcome for the customer.  If the quality of advice is compromised, this may lead to an increase in suspension applications late in the process.

A Government consultation will end on 17 March and we will report on what is published.

Interest only Mortgages and debts into retirement

Back in 2013 the FCA identified 2017 / 2018 as a peak year for the expiry of interest only mortgages;   a result of endowment mortgages sold in the mid 1990's and early 2000's. It is expected that some 85,000 interest only mortgages will expire between 2017 - 2018.

To compound the issue of expired mortgages, a report published by Prudential on 17 February highlighted that 25% of retirees in 2017 would retire with outstanding debt including unpaid mortgages. 

Where an interest only mortgage has expired the lender is entitled to repayment of full debt. The Courts only have a limited discretion to allow customers time to pay before granting a possession order and have no power to require the debt to be paid off by instalments, which would effectively increase the mortgage term.  

Nevertheless, this is a sensitive area and lenders will want to make sure that they are balancing their obligations to treat customers fairly while ensuring that the debt is settled.  TLT has an experienced team dealing with term expired mortgages and for assistance in this area please contact Sarah Vance. 

Super trade body a step closer

In February and April last year, we reported on the growing support for consolidation of a number of existing trade bodies into a new organisation. This restructuring was driven by a review commissioned by nine of the UK’s largest banks in March 2015. The aim was to build a strong and effective body capable of speaking out for the industry with one voice.

A year later, a number of the trade bodies are now in a position to move forward - in most cases having consulted their members regarding the merger. The new organisation will encompass The Asset Based Finance Association, The British Bankers' Association, Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and UK Card Association.

The new organisation does not yet have a name but, details are expected shortly. It is anticipated that the body will launch in summer 2017. 

We will report on the progress and name of the new organisation as soon as more details become available. 

BOE proposes reduction of capital burden on smaller banks

The Bank of England has proposed a reduction to the capital requirements for smaller lenders, with a view to encouraging competition.

The proposition is intended to reflect the disparity in risk between larger and smaller lenders, reflected in the Prudential Regulation Authority 2016 report on competition.

Capital requirements have become a contentious topic for smaller lenders and market entrants, with large lenders permitted to rely on their own risk modelling to establish their capital requirements.  Smaller market participants, on the other hand, are required to use a standardised approach that they say requires them to hold disproportionate levels of capital.

In addition to the impact on competition, the PRA predicts that its proposals will increase stability in the sector by reducing the incentives for smaller lenders to offer high LTV mortgage products.

The PRA is currently hosting seminars to discuss the proposal with SME lenders, with a summary of these discussions to be published shortly.

Housebuilders bounce back as sales surge

Housebuilder Taylor Wimpey has reported pre-tax profits of £733m in 2016, an increase of 21.5% from 2015 with overall revenues up to £3.7bn. The developer pointed to low interest rates and a competitive mortgage market as key factors, as well as an increase in the average UK selling price from £230,000 to £255,000.

Already there is an order book for 2017 for 8,573 homes worth £1.98bn.  However, the London market continues to suffer with only 58% of houses forward sold compared to 76% in 2016. 

These strong results follow the pattern of results with rival Persimmon, which reported pre-tax profits of £782.8m in 2016 against revenue of £3.14bn. Persimmon also saw the number of completions rise from 14,572 in 2015 to 15,171 in 2016.

Interest rate rise could push over 18,000 more into bankruptcy

According to calculations from the Government’s Insolvency Service, if interest rate figures rose by 1%, over 18000 people would be pushed into insolvency, says accountancy firm Moore Stephens. That would mean 275,900 people being made bankrupt by 2020, when the next general election is expected.  At current interest rates, 257,800 would be made bankrupt. 

Figures also indicate that were the Bank to increase the rate by only 0.5%, by 2020 it would still cause an additional 9,700 insolvencies. 

Whilst total individual insolvencies rose in 2016, they were at their second lowest level for 11 years, according to the Insolvency Service figures. 

The Bank of England’s rate-setting Monetary Policy Committee is coming under pressure to increase rates as inflation breaks its 2% target. Nevertheless, the Bank of England is widely expected to keep the current interest rate until at least the end of 2018. 

Lending

January Mortgage lending figures at nine year high

The Council of Mortgage Lenders said about £18.9bn-worth of home loans were handed out last month - the strongest lending total for the month of January since 2008 up 2% compared on January 2016.

Mohammad Jamei, a senior economist at the CML, said: "We seem to have a twin-track market. Weakness in buy-to-let and home movers has been offset by an increase in first-time buyers and re-mortgage lending.  A continuing acute shortage of homes being offered for sale is one aspect of a broken housing market, that looks unlikely to resolve in the near term."

The CML also reports that mortgage approvals for house purchases recovered in the last three months of 2016 and rose to 68,000 in December. This is down from 70,000 a year earlier, but a 'marked improvement' from the 61,000 figure reported last summer.

The Bank of England’s Monetary Policy Committee now expects 71,000 loans to be approved each month in the first nine months of 2017.

Read the CML's press release and full market commentary.

Students can buy for Uni

One of the most expensive aspects of going to university can be accommodation. Loughborough Building Society has launched a new mortgage product to allow students to get a mortgage to buy their own property. The repayments are financed by the student renting out the unused rooms to fellow students.

The Society will lend 100% of the value of a property valued up to £300,000. It must be within ten miles of the university and must have separate bathroom facilities to make renting the unused rooms viable. 

The product is similar to first time buyer family mortgages in that a close family member (parent, step parent or grand-parent) must commit to covering any rent/mortgage shortfall by providing either a guarantee or a charge over their own property.   Other requirements apply where the loan to value ratio is 80% or higher including providing security for 20% of the value of the property. 

A similar mortgage product has been operated successfully by the Bath Building Society for a number of years. 

As with family mortgages the family member will need independent legal advice.  Lenders wishing to develop similar products will need the assistance of lawyers who understand the novel complexities.  TLT has expertise in this area.

Regulation

Guardianship for financial affairs of missing persons

Every year 200,000 people go missing. In many cases family members are left without financial support or access to the missing person's assets. Mortgages can go unpaid but, lenders are bound by confidentiality to their customer making resolving the arrears with the family difficult.  

There have been several false starts in introducing legislation to tackle this problem.  However, the new Guardianship (Missing Persons) Bill seems to be gaining traction. The main provisions of the Bill allow for a guardianship order to be obtained if a person is missing for more than 90 days.  This will allow a guardian to be appointed to:

  • Sell, let or mortgage the missing person's property
  • Execute deeds or documents on the missing person's behalf;
  • Recover money owed to the missing person
  • Pay the missing person's debts

These powers would allow the Guardian to service the mortgage account or discuss arrears with the lender. The Council of Mortgage Lenders has stated that this is a welcome and practical way forward for lenders. 

The CML have also commented that they would like to see a register of guardians similar to the register of deputies appointed under the Mental Capacity Act. 

Parliament is expected to consider the Bill again on 24 March 2017 and we will report further on progress.

Log Book Loans Regulation

In September 2016 the Law Commission published a report on consumer lending against assets.  Primarily this relates to a loan secured against a consumer's vehicle via a log book loan. Currently this is an unregulated area.

The Law Commission highlighted that the law on log book loans is archaic and ought to be updated and brought in line with consumer lending used to finance the purchase of assets. For instance, where an asset (such as a vehicle) is purchased under a hire purchase or conditional sale arrangement, the asset cannot be taken into possession without a court order once the customer has paid a third towards the price of the asset. There is no similar consumer protection where a customer obtains a log book loan. 

On 7 February 2017, Parliament considered the Law Commission's report and agreed that the Law needed updating to create a fit-for-purpose consumer credit regime.  However, the Government stated that they wished to reflect further on the position and to discuss the way forward with key stakeholders before reaching any decisions. This suggests that reform of this area of lending is still some way off and may currently be a low priority for the Government.  

Court of Appeal tightens the ability to resist subject access requests 

The recent decision in Dawson-Damer v Taylor Wessing LLP  will disappoint many businesses that regularly receive wide-ranging subject access requests ("SARs") under section 7 of the Data Protection Act 1998 ("the DPA").

The case involved a SAR submitted by the data subject and beneficiary of a Bahamian trust  against Taylor Wessing , the solicitors for the trust and the DPA data controller. The Court of Appeal considered the grounds on which Taylor Wessing had successfully resisted the SAR at the first instance hearing, including (1) purpose and (2) proportionality. 

Taylor Wessing argued that the SAR was made for an improper purpose as the Claimant would not be able to obtain the disclosure in Bahamian legal proceedings. However, the Court held that the purpose for which a data subject makes a SAR does not limit the data controller’s obligation to comply with the SAR. This may encourage the use of SARs as a litigation tactic to obtain early disclosure.

Positive news for data controllers is that the Court clarified the "disproportionate effort" exemption. The DPA contains an exemption from the obligation to respond to SARs with copies of data in a permanent form, if this is not possible or would involve disproportionate effort. 

The Court stated that this can apply where the disproportionate effort relates to the search process rather than the requirement to provide the data in a "permanent form". The burden was on the data controller to evidence this and Taylor Wessing had failed to discharge this burden. 

There is no judicial determination on what would amount to disproportionate effort.  TLT has extensive experience of assisting clients with SARs and related processes, so get in touch if you have any queries in this area.

Digital

Digital Mortgages Update

In August we reported about a small trial of electronic mortgage deeds run by the Land Registry.  'Gov.UK Verify' was the system used to verify the borrower's identity via a third party certifier, which included Barclays, Experian, Royal Mail and the Post Office.  

Following this trial, a consultation has been published regarding the use of digital signatures in conveyancing documentation. The initial plan is for an electronic signature of mortgage deeds in remortgage transactions.  Once this is established, the system will be expanded so that a transfer and a mortgage could be signed electronically in a purchase transaction. 

The Land Registry plan to make various mortgage deed templates available on their website. Lenders will need to get their proposed digital mortgage deed templates approved by the Land Registry's Commercial Arrangements team and issued with an "MD" number in a similar manner to how lenders currently get their paper mortgage deeds approved. 

Customers' signatures on the mortgage deed will be certified by the Land Registry meaning that there will no longer be any requirement for separate witnesses. The Land Registry state that this will mean the signature will have a high degree of identity assurance and will also indicate the mortgage deed has not been tampered with. 

The consultation ends in April and we will report again once further news is available. 

Digital challenger raises £95.5m

Monzo, the online-only challenger bank has undertaken a fresh round of investment, raising £19.5m and increasing its value to £65m.

This recent investment follows crowd funding and private investment of £22m last year. It was led by various venture capitalists known for their investment in social media, together with France Telecom.

Monzo hit the headlines last year when it raised £1m via crowd funding in 96 seconds. The bank plans to raise a further £2.5m via the same method this year, expecting investment from some 5,000 private individuals, many of whom are drawn from the bank's 100,000 strong customer base.

Having obtained its banking license last year, Monzo plans to apply the funds to its capital requirements to become a full bank, in order to offer current accounts. Its current product range is restricted to pre-paid Mastercards and iOS and Android apps. These track spending in real time, providing a geographical spending analysis and breaking the customer's spending down into categories of products and services.

On the ground, Monzo has reported plans to double its headcount to some 170 in the next 12 months and to quadruple the size of its office space.

Peer-to-peer

Peer-to-peer lending snapshot

It has been another busy month in the peer-to-peer sector: 

  • AltFi reports that the alternative funding market has now lent £10 billion. Most of this has been from peer to peer marketplace lending, with 60% accounted for by Funding Circle, Zopa and RateSetter.
  • Funding Circle has now lent over £2 billion to small businesses in the UK. According to AltFi, Funding Circle is the second marketplace lender to reach this milestone, after Zopa reached it the month before. 
  • Also with the £2 billion figure in their sight is MarketInvoice, who aim to reach this by the end of 2017. Business Insider reports that to fuel this growth the company is relying on a new product, which lets businesses draw credit from investors secured against their total unpaid invoices rather than individual bills. 
  • New marketplace lender Flender has appointed Equifax to assist with underwriting its loans within the UK SME market. Finextra report that this will enable the underwriting process to be automated, with Equifax supplying real time data leading to a more robust underwriting process.
  • The Wall Street Journal reported that the US has seen high rates of defaults in the peer-to-peer lending market, which is impacting returns. Many commentators consider the US peer-to-peer market higher risk than in the UK due to different approaches to high risk loans.
  • Finally, on 28 February, the FCA sent a "Dear CEO" letter to loan-based marketplace lenders advising that where a borrower uses funds provided via a platform for on-lending, the lender concerned is likely to require a permission to accept deposits, without which they may be committing a criminal offence. The FCA is looking into this issue and requires firms to report back by 14 March 2017.
Contributors:

Jason Gurung
Sam McCollom
Mike Seddon
Duncan Coates
Dean DeCesare
Sam Storey
Ben Hanham

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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