There is little doubt that the level of fee for any loan type will vary from one lender to another. It is, however, rare for fees outside the sub-prime market to exceed 0.5% of the loan amount. Assuming an average loan of £70,000, a fee of around £350 will be paid when a case completes. This is not a substantial sum and intermediaries would not be tempted to compromise their professional standards and nudge a client towards an unsuitable lender. But double that sum to £700 at 1%, you have the average fee paid to an introducer by a sub-prime lender.
Furthermore, a number of sub-prime lenders distribute products through third-party multi-lender organisations ‘ or packagers ‘ and these organisations are additionally rewarded for their wider marketing activities, for distributing products to intermediaries and for packaging the business for the lender. This in itself does not seem unreasonable bearing in mind many lenders sub-contract an element of their operations. By doing so they can reduce their costs and create better products for their borrowers.
The combined value of fees paid out by some lenders could be over 2% when taking into account fees to both packagers and introducers. It is inevitable that a greater combined value will lead to concerns about the potential for mis-selling ‘ the possibility of some borrowers being directed towards sub-prime when, with a bit of pushing and shoving, they could be squeezed into a regular product. There is also the chance that borrowers clearly in the sub-prime sector are directed towards a less suitable lender/product combination because fees are higher at lender A than lender B.
Intermediaries are an essential part of the market and equally, some lenders find that packagers deliver efficiencies that would otherwise be unavailable and I cannot think it is unreasonable they should continue to do so.
Things can go wrong when lines become blurred and the relationship between two organisations is not clear. It is important the service for the potential borrower is set out from the beginning: are they getting advice or simply information?
One issue in need of greater transparency is the packager role. I can see three possibilities: either they service the lender, the intermediary, or the consumer.
Personally, I am persuaded that while not ideal, the Mortgage Code achieved the right kind of balance on this issue. But clearly some interested parties disagree: otherwise the Government would not have decided to regulate advising on and arranging mortgages as they have done.
John Heron is managing director of Paragon Mortgages