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:
Peer to peer round up
Focus on Scotland
The number of cars bought on credit was down 8% in June, according to the Finance and Leasing Association (FLA). This follows previous growth of double figures (since 2013).
According to the FLA its members provided approximately 86.3% of finance for private car purchases.
Personal contract purchase plans (PCPs) have also been in the news recently as they proved to be a popular route to a new car. Unlike a car loan or Hire Purchase agreement, at the end of a PCP you don't own the car outright. You can make a final payment to own it, hand the keys back or trade it in for another new car (strict terms apply).
Last month, the FCA provided an update on its work in the motor finance market. It warns there is a risk to consumers where affordability checks weren't thorough and documentation is unclear.
The FCA wants to consider the terminology used in the motor finance market to make it more understandable for consumers. It plans to focus on:
An update is expected in the first quarter of 2018.
We previously reported on an increasing trend of Welsh only laws – The Housing (Wales) Act 2014 was one of those. It deals with a whole range of issues, including the private rented sector, homelessness and the provision of sites for gypsies and travellers.
Obligations on private landlords of Welsh properties and failure to follow them include the following:
A number of estate agents have predicted that UK house price growth will slow by 1.5% in 2017 (down from 5% last year). It is claimed by some commentators that Brexit negotiations are a contributing factor.
A survey released last month by RICS showed that the majority of surveyors predicted near zero growth between June and July 2017. In addition, Rightmove released figures showing a 0.9% reduction in August's prices.
Central London has borne the brunt of this slowdown (being the area most dependent on overseas investment) with areas of the Midlands and the North bucking the trend and demonstrating growth. For example, prices in Northamptonshire, Derbyshire and Norfolk surged by 9.1%, 7.9% and 7.4% respectively, suggesting that some regions remain less affected by macroeconomic factors. Alternatively (in the case of Northamptonshire), they are well placed to benefit from buyers looking to secure affordable deals outside of London.
However, agents accept that a general slowdown is to be expected over the summer months and the last quarter of 2017 may see increased growth, with interest rates remaining low and wages expected to increase into 2018. Furthermore, if the market sees Brexit negotiations moving forward, confidence may increase and the summer slow-down may prove to be a temporary situation.
Fears are growing within the lending industry that the Bank of England (BoE) is fuelling a dangerous bubble due to cheap loans to banks.
Mark Carney initially set up the £100 billion Term Funding Scheme in August 2016 to encourage lenders to borrow money at a reduced rate in an effort to keep spending levels up after Brexit. This led to rapid lending over the past year. The BoE has increased the fund by £15 billion to account for the high demand for consumer loans at reduced rates.
There are concerns that this will lead to risks for consumers who take on too much debt, which could be exacerbated when interest rates finally start to rise (although recent reports don't envisage a rise until 2019). The BoE’s financial stability director, Alex Brazier, warned lenders against pushing the boundaries by offering riskier mortgages and loans, and entering "a spiral of complacency where standards can quickly go from responsible to reckless”.
The BoE has yet to comment, but no doubt lenders will be aware of the risks posed as consumer lending continues to gather pace.
The last year has seen a sharp rise in the number of new micro-homes – up 40%. Such homes can be as small as 8 sqm (less than the size of a parking space). 7,800 were built in 2016, over 2,000 more than in 2015. 2013 saw changes in planning (allowing offices in city centres to be converted into flats). This has helped the increase.
Micro-homes are not just the preserve of the London housing market, they are appearing in increasing number in places – Liverpool, Leicester and Bristol. However, despite being more affordable, some lenders will not lend on properties with small floor plans (less than 30 sqm). The concern is the future value of the investment. It therefore remains to be seen whether this is a long-term solution to the present housing shortage.
British gambling authorities have issued a warning to home-owners thinking of putting their house into a home raffle. Property owners sell raffle tickets in order to raise funds as an alternative to the housing market. Despite the increasing trend to sell homes this way (especially higher end properties), few are aware that this can a breach of strict gambling rules, and can carry a criminal penalty of 51 weeks in prison as well as a £5,000 fine.
Lotteries, raffles and tombolas (based purely on luck) can only be used for charitable purposes. In order to be legal, home raffles require an element of skill, eg a multiple choice question. Without this, a home-raffle is legally classed as a lottery, in breach of anti-gambling laws. Companies have been set up specifically to market homes as a raffle, but there are often complicating factors meaning homeowners could inadvertently fall foul of the law.
In February, we reported that the government had launched a consultation of the 117 duty solicitor schemes which provide borrowers with support at possession hearings. Each of the schemes is tendered out to service providers. The government considered consolidating the schemes to make them more sustainable and to introduce an element of price into the tender process.
The results of the consultation have now been published. Over 80% of responders disagreed that consolidation would create more sustainable schemes. The responses indicated that consolidation would mean that providers would have to serve a number of courts and travel further to individual courts, particularly in rural arears. This could harm the service provided as it would be harder for providers to establish good relationships with the courts and local benefit agencies. It may also discourage follow-up advice being given to borrowers.
Over 86% of responses also disagreed that price should be a competitive part of the tendering process as this could harm the quality of the service.
Despite the consultation result, the government remains convinced that consolidation will result in more sustainable schemes. The Legal Aid Agency is now planning to engage further with providers regarding the structure of future tenders. We will report on further news as it becomes available.
On 1 October 2017 the new pre-action protocol for debt claims (DPAP) will be introduced. UK Finance recently questioned whether DPAP should apply to claims were a lender is seeking possession on expiry of the mortgage term.
Possession claims based on an expired mortgage term, or another contractual breach of the terms of the mortgage (other than mortgage arrears), will fall between the existing pre-action protocol for possession claims (based on mortgage arrears) and the new DPAP.
We do not believe that DPAP was intended or considered for mortgage term end possession claims. We understand that clarification as to the scope of DPAP is being sought from the Civil Procedure Rules Committee. In the meantime, we have prepared a guide on a practical way forward for lenders, which is available here.
HM Courts and Tribunal Services are struggling to maintain court buildings and it is hard to justify spending funds on buildings which are not adequately utilised. In order to make better use of the court buildings a pilot is being run to extend the hours in which the court will be operational. For civil matters, this pilot will operate at the Manchester and Brentford County Courts and these courts will remain open to 7pm.
The court will test additional time slots for hearings which lend themselves to shorter, more flexible slots.
It is not yet known whether any possession hearings will be listed in the later slots. If hearings are listed after conventional business hours, this may interfere with the lender's ability to react to late payment proposals made by the customer. As such, it will be important to prepare for all eventualities in advance of the hearing.
We will report further as more details become available.
The rise in equity release mortgages (34% last year) hasn't made much of a dent in the market (less than £2.2 billion last year). Despite this, insurers and banks see equity release as a potential answer to the financial pressures faced by the British population for the following reasons:
The number of people owning multiple properties increased from 1.6 million to 5.2 million between 2000 and 2014, according to the Resolution Foundation.
Together with reduced numbers of UK home owners since 2000, the increase in amateur property investment has concentrated property wealth over the past 15 years, creating increasing demand from lenders for greater depth and flexibility in the buy-to-let (BTL) market.
In addition, the average value of second properties has increased by 20% (in real terms) over the same period, from £125,000 to £150,000.
The government increased stamp duty and reduced tax relief on second properties. The aim was to dilute the concentration of property wealth and assist younger house hunters. At the same time, regulators are now turning to lenders, with a view to mitigating the perceived risk of the BTL sector.
From 30 September 2017, lenders must change their underwriting processes for BTL portfolio landlords (i.e. those with four or more investment properties).
The PRA will require lenders to carry out specialist affordability checks on borrowers falling into this category, with a view to ensuring that portfolio landlords are not (and do not become) over-exposed. Whilst the criteria for the new checks have not yet been made public, commentators anticipate that they will focus on investment experience, a business plan, total borrowing, additional assets and liabilities, anticipated cash-flow and income from both property and external sources.
As we saw prior to the implementation of the new tax regime, lenders may see an increase in BTL applications before the end of September 2017, as investors race to obtain offers before the new rules come into play.
The Waugh case concerned a 2003 mortgage registered as a legal charge. The mortgage deed was not witnessed so the borrower applied to remove the charge from the register. Proceedings in the High Court followed and the Court confirmed that the lack of witnesses prevented creation of a legal charge but the lender, nevertheless, had an equitable charge.
The Court ordered the borrower to execute a new legal charge in favour of lender. The Court was clear that it would do so if the borrower refused – it duly did so in 2014.
The lender subsequently appointed receivers who sold the property. The borrower objected to the buyer being registered as proprietor of the property on a number of grounds. One of which was that the bank had not executed the charge and no notice of the receivers' appointment had been served on the borrower.
The Court held that the borrower's objections were groundless.
The Court did comment that the charge executed by the Court was a fresh security and could not be backdated to 2003. This may have implications for priority of the defective 2003 charge but this point was not explored further by the Court. Despite this, the case provides a welcome clarification in respect of correcting execution errors in original mortgage deeds.
The Financial Times recently reported that peer-to-peer lenders will have to disclose detailed information about how much their investors have previously lost on loans through them. Last December, the FCA began its review of this sector's regulations. New proposals are expected later this year. The FT reported that the FCA refused to comment on the development and content of the new rules.
Zopa is reducing its higher risk lending due to concerns over the consumer credit outlook. It also expects to see slightly higher losses on existing loans.
This is an interesting development, at a time when the FT reports that demand is currently outstripping traditional loans.
Finally, peer-to-peer lender ThinCats, a member of the Peer-to-Peer Finance Association, is the latest marketplace lender to secure full FCA authorisation.
ThinCats says that this will pave the way for a number of new developments including the launch of a ThinCats ISA (subject to obtaining approval from HMRC).
On 3 July 2017, new rules increasing the powers of lay representatives in Scottish courts came into force. Previously, lay representatives were restricted to speaking on behalf of a party who was without legal representation (a "party litigant"). The new rules mean that lay representatives can now represent the party litigant in full. As such, the lay representative may do "anything in the preparation or conduct of the hearing that the party litigant may do" including addressing the court, questioning and cross examining witnesses.
In order to have a lay representative (it's not an automatic right), an application must be made to the appropriate court in the "interests of justice". Lay representatives must not be paid.
Lay representatives now have far wider powers in the Scottish courts which it is hoped will provide greater access to justice. Lenders may see an increase in the number of civil actions which are defended. Defenders who are unwilling/unable to obtain legal representation may turn to a lay representative. It is yet to be seen how widely lay representatives will be used.
Lay representatives can range from friends and family to professionals who provide free legal assistance. Therefore, there is no certainty that an increase in lay representatives will streamline the court process for the parties.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.