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Busy lenders' monthly round-up - May 2016

Welcome to TLT's busy lender's monthly round-up. Each month we summarise the latest news and developments in mortgage litigation and regulation.

This month in summary

Mortgages

  • Local Land Charges (LLC) consultation
  • "Divorce mortgage" launched
  • Banks tighten buy-to-let lending criteria
  • Decrease in remortgaging to increase debt
  • High LTV mortgages get cheaper
  • Government to make switching lenders easier
  • West Bromwich ruling – increases to tracker mortgage rates unfair

Economic outlook

  • Bank of England and Financial Services Act 2016
  • The CMA's take on retail banking
  • G7/FATF anti money laundering and terrorism finance
  • Challenger bank raises over £850,000 in 10 seconds
  • Hedging contracts are not wagers
  • Lending into retirement and the effect of the pension reforms

Local Land Charges (LLC) consultation

Local Authorities have wide ranging powers which they can use to protect the public and to provide assistance to those in need.  These powers arise under a number of different laws and often allow the Local Authority to register financial charges against individually owned properties.  Each Local Authority is obliged to maintain a record of financial charges and other obligations on a LLC register.

In a bid to centralise and digitise this information (for online access), responsibility for the English registers will be transferred to the Land Registry.  This month the Land Registry has launched a consultation for approval of the change in law to accomplish the transfer.

Lenders will often come across LLC when they enforce their right to sell a mortgaged property.  A buyer will want to ensure that all financial LLC are removed.

However, LLC do not automatically have priority over a lender’s charge and it is necessary to consider the priority carefully.  On sale completion, the Local Authority must be asked to remove any non-binding LLC from the register.  Local Authorities are not always co-operative initially – if they update the register the security for their outstanding debt is lost. 

In a welcome move, the transfer of LLC to the Land Registry will separate the owner of the debt from the controller of the registration.  The Land Registrar will be able to remove LLC when the Registry is satisfied the charge ceases to have effect. The separation should make this less onerous. TLT is currently considering the draft law carefully and will provide further updates on this area in due course.

Bank of England and Financial Services Act 2016

Next month most of the Bank of England and Financial Services Act 2016 will come into force.  This Act is part of the Government’s reforms to increase stability in the banking system in order to build a resilient economy following the financial crisis.

The first part of the act deals with reforms to the Bank of England (BoE)–making changes to the governance of the BoE. The Prudential Regulation Authority will no longer be a subsidiary of the BoE. Instead, its functions will be wholly transferred to the BoE through a new group.  The National Audit Office will also be able to conduct reviews on behalf of the BoE

The second part of the Act is aimed at more general financial reforms. The Treasury will have more powers to tackle illegal money lending; there will be a scheme of free advice for pensioners selling their annuities; and there will be measures to promote diversity and competition in the banking sector. 

Ultimately these reforms will place the BoE at the centre of the UK’s economic and financial systems so that it can oversee monetary policies for the UK.  It remains to be seen whether the greater powers given to the BoE will create an effective watchdog to safeguard the banking system.

The CMA's take on retail banking

After a two year investigation, costing £5 million, last month the Competition & Markets Authority (CMA) finally unveiled its proposed "remedies" for the UK's multi-billion pound personal current account and small business banking market. 

The CMA did not propose the UK's largest banks split up and end free banking (as initially thought). Instead, the proposal focussed on encouraging lenders to make their fees more transparent and introduce tools aimed at opening the market to new competitors.

A key proposal by the CMA was that banks ought to set a monthly maximum charge for unauthorised overdrafts on personal current accounts and send customers alerts prior to any overdraft limits being breached, not after. This measure is aimed at improving customers' profiles and making it more likely they will be accepted by alternative banks when looking to move their accounts. This will, in turn, introduce greater competition between the banks to attract and retain retail customers.



Time will tell whether we see the predicted £1 billion of savings to customers – forecast by the CMA – as a result of these changes together with the rise of online comparison tools covering the banking sector and the sharing of customer data between third parties.  For now, it appears to be a case of "business as usual".

G7/FATF anti money laundering and terrorism finance

The G7 Finance Ministers, Central Bank Governors and Financial Action Task Force met in May to discuss money laundering and terrorist financing.



The meeting focused on the importance of transparency of beneficial ownership for taxation purposes, as well as crime and terrorism. Following the meeting, the G7 published an action plan on combating the financing of terrorism which sets out its members' commitment to enhanced information sharing, cooperation and implementation of terrorist asset freezing measures.

The discussion resulted in the following key recommendations:

  • Enhanced information exchange and cooperation for countering the financing of terrorism;
  • Reducing the threshold for declaring cross border transactions; 
  • Commitment to applying financial sanctions; and
  • Increased investment in the Task Force itself.

To date, 198 jurisdictions have committed to fully implementing the recommendations.  The Task Force believes that this gives the majority of countries the tools required to deprive criminals and terrorists of their funds.  The current challenge is the effective use of those tools. In the UK, measures resulting from the recent anti-corruption summit are aimed at achieving that goal.

"Divorce mortgage" launched

Lenders are set to offer a product which will allow one partner to buy another out of a joint mortgage on divorce, enabling one half of the divorcing couple to remain in the family home.

The product is anticipated to be especially useful where children are affected by divorce, as it will reduce the disruption to family life.

Whilst the loan is likely to be available to borrowers up to the usual age limits, a key motivating factor is the recent increase in divorce amongst the over fifties.



In addition, increased scrutiny on affordability has made it difficult for a single divorcee to continue with a mortgage that was originally underwritten on the basis of two incomes.

The product is set to hit the market by the end of this year.

Banks tighten BTL lending criteria

New lending criteria and tougher tax rules could price many small scale landlords out of the market. A number of mainstream lenders have increased their required rent to mortgage ratios from 125/135% to 145%.In addition, as of next year, landlords will not be able to claim tax relief on mortgage interest.

Commentators anticipate that small scale landlords who, for instance, saw buy to let property investment as an alternative to pension plans or people setting up "let to buy" arrangements may struggle to maintain their mortgages in light of these changes. 

Further pressure may be applied to the buy to let sector based on the Bank of England's recent recommendation that lenders should take a wider range of fees and charges into account when considering affordability.

However, the Bank of England has also recently released research forecasting increases in rental income, as demand for buy to let accommodation continues to increase. This, combined with current, low interest rates, suggests that landlords may have better prospects of getting over the 145% rent to mortgage threshold.



The risk remains - increased pressure on landlords will result in further pressure on tenants as rents are raised to meet lending criteria. This will further reduce the prospects for tenants trying to save a sufficient deposit to purchase their own property.

Challenger bank raises over £850,000 in 10 seconds

Digital challenger bank, Tandem, raised £850,337 in ten seconds, before demand crashed its host site.

Once the site was back up and running, Tandem managed to raise £1.8 million, almost £1 million over its target, from around 1,000 investors, in just eight hours.



Investment was open only to pre-registered applicants. EU law prevented Tandem from raising more than £3.86 million. The bank therefore needed to balance the risk of opening its fund to the public against this cap.

Tandem received a banking licence in November 2015 and boasts high-profile executives – formerly of Santander and Williams & Glyn. The lender is looking to stand out by offering a proactive approach to money management - helping customers make their money go further rather than selling products that will make the bank money. This will come in the form of notifications of missed payments and warnings when a customer approaches their overdraft limit. The lender also offers preferred rates for alternative savings and investment services, both internally and with third parties.

Tandem's meteoric fundraising is similar to the results achieved by selfcert.co.uk which received 4,000 applications for funding in its first 48 hours of trading in January.

Decrease in remortgaging to increase debt

The number of people remortgaging in order to increase the size of their borrowing fell by 4% to 24% between March and April this year, according to statistics published by LMS. This is also a 6% fall from April last year. The number of people increasing their loan by more than £10,000 has also decreased by 6% between March and April.

By contrast, the number of borrowers remortgaging in order to reduce their monthly payments increased by 7%. This figure is the highest it has been since June 2015. Of those who remortgaged 40% cut their monthly repayments by up to £500.

Whilst the market for remortgaging remains strong, the reasons for doing so are changing. Homeowners are shifting from using their home loan to reduce other debt and are trying to increase their disposable income for use elsewhere.

People are also remortgaging in order to take advantage of lower rates. The percentage of people doing so rose by 6 percentage points from February and March to April.  This is a reflection of the competitive rates that are currently available.

High LTV mortgages get cheaper

High loan-to-value (LTV) mortgages are becoming cheaper for borrowers. The difference in rates between the average two-year fixed mortgage at 60% LTV and 90% LTV has reduced by 0.93% in just two years. The lowest two-year fixed rate at 90% LTV is now 1.99%. 

One of the reasons for the reduced rates is competition – there has been a rise in the number of mortgages which are available at high LTVs. This increased competition between lenders has given borrowers greater choice of mortgage providers.

Current deals also represent a long term retention strategy which could mitigate the risk of a much discussed rate increase in the mid-term.

This is good news for borrowers with small deposits and, in particular, first time buyers.  Lenders have previously only lowered rates for "low risk" borrowers, such as those with greater equity in their homes. Most cuts have therefore previously been aimed at 60-65% LTV mortgages.

Government to make switching lenders easier

The Government has announced proposals to enable borrowers to switch mortgage providers within seven days.

This is a part of wider proposals contained in the Digital Economy Bill which aim to facilitate switching across various consumer services, including energy, mobile phones and broadband. Business secretary, Sajid Javid, has suggested that consumers may be missing out on the cheapest deals as they are deterred by complex and time-consuming switching processes.

The changes would bring mortgage accounts in line with services such as current accounts, where consumers are already entitled to switch within seven days.



Whilst this appears to be good news for consumers seeking the best deals, there are risks. Regularly swapping mortgages could affect a borrower's credit rating.

Further, mortgages could become more expensive. Lenders base their pricing on how long they anticipate borrowers staying with them. If borrowers regularly swap providers, costs (including early repayment fees) could be increased for all parties. This could negate the cost-saving benefits of switching.

The Council of Mortgage Lenders has said that it supports faster switching but has questioned whether a one-week timescale is practical, given the regulatory requirements that mortgage lenders must fulfil.

Hedging contracts are not wagers

In the case of WW Property Investments Ltd v National Westminster Bank Plc [2016] EWHC 378 (QB) WW Property Investments Ltd (WW), between 2004 and 2010, entered into four interest rate hedging contracts (collars) on borrowings from his bank. 

WW claimed that the collars amounted to wagers. It is implied into a wager that the parties’ chances are equal, with each party having equal ignorance or knowledge of the odds. WW claimed NatWest had more favourable chances due to their knowledge of the arrangement and, as such, the contracts were voidable.

This same argument had been unsuccessfully advanced in earlier cases. In the earlier decisions the court concluded that the swap contract was made for a commercial purpose - hedging the risk of interest rates increasing over the term of the loan. The collar was held not to amount to a wager.

Rejecting the wager argument the Judge in this case commented; “I regard this yet further attempt to raise substantially the same arguments as on previous occasions … as pointless, expensive and wasteful litigation.”

Apart from anything else, the Judge found that the claim had already been settled when WW settled its claim for redress under a compromise agreement that arose from the FSA (now FCA) review.

Lending into retirement and the effect of the pension reforms

In the February 2016 edition of Busy Lenders we reported on the FCA's discussion paper into lending to the aging population and the call for new products and services to allow the aging population access to financial products.

There can be no doubt that lending to the older population has become a hot topic and an area of innovation in lending. Over half of the UK's building societies now lend up to or over the age of 80. In a recent speech, Linda Woodall, of the FCA commented that the FCA would be looking into whether new products are needed to bridge the gap between traditional mortgages and lifetime loans. The Council of Mortgage Lenders (CML) has also recently announced it is to undertake a wide project into this area which they expect to last until the end of this year.

Lending to the aging population is not without its risks. There is unpredictability around income, which will later become limited and additional unknown spending to cover care in old age. In addition there is the unknown certainty around the effect, if any, that the pension reforms will have on affordability.

Pension freedoms, introduced last April, allow anyone over the age of 55 to take some, or their entire, pension as a lump sum. Withdrawing pension savings for anything other than investment may affect the ability to pay an outstanding mortgage, particularly when interest rates rise.

The effect of the pension reforms on the development of lending to the aging population will remain to be seen. We anticipate this will be a widely discussed issue over the rest of the year. Indeed, the CML has announced that this will be one of the considerations of its project.

West Bromwich ruling – increases to tracker mortgage rates unfair

The West Bromwich Building Society must repay approximately £27.5million to landlord customers on its buy to let tracker mortgages following a Court of Appeal ruling on 8 June 2016.

In 2013, the building society varied its interest rate margin on mortgages issued to around 6,500 investors and landlords with multiple properties. The change was made in line with a provision in the terms and conditions enabling the building society to vary the rate "to something more in line with the current market norm".

In order to protect the best interests of its members – including savers as well as borrowers – and in accordance with its overarching duties to treat customers fairly, the building society stated that it could not ignore this clause, given that savers had suffered a dramatic fall in income due to lower interest rates following the credit crunch and that the cost of providing loans had increased.

The Court of Appeal has decided, however, that the relevant clause in the terms and conditions was inapplicable in these cases on the basis that the offer documentation provided by the building society to its borrowers indicated (at variance with the terms) that the rate would only be varied in accordance with changes in the Bank of England Base rate.

The building society has confirmed that it is disappointed by the ruling. However, it accepts the Court's decision and it will repay the additional interest to all of its affected borrowers – even those customers who were not involved in the court action.

This ruling sets a precedent for the wider mortgage market and its treatment of interest rates.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Contributors to this month's Busy Lenders Update are: Amy Difford, Lucy Emanuel, Ben Hanham, Katie Hill, Duncan Martin, Sam Storey, Lynsey Robinson and Catherine Zakarias-Welch.

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