It said the bridging sector should consider the prospect of being asked to repay hundreds of borrowers millions of pounds in penalty fees which are in some cases double or treble the amount of the borrower’s contractual rate.
Nigel Alexander, director at Fincorp, said the company has set its default rate at 1% per month to cover the administration and additional time is has to spend in recovering the property which the loan was secured on.
“In our professional view there is nothing wrong with this. It is perfectly reasonable to put in place measures to cover our costs. But lenders should not be unjustly enriched by a borrower’s default,” said Alexander.
“The fact that headline rates are dropping means lenders are being forced to find ever more ingenious ways to make a big enough margin to keep delivering returns to their investors.”
Alexander highlighted the practice of back dating the charges to the start of the loan which causes a considerable immediate cost to the borrower if they fail to repay the loan one day over a six-month term, for example.
A clamp down on charging unfair fees is already underway. Wonga was in the frame in June this year for sending mis-leading and threatening debt collecting letters and in some cases charging customers for the cost of the letters. The Financial Conduct Authority (FCA) ordered the payday lender to pay over £2.6m to 45,000 customers.
Last week Yorkshire Building Society was fined £4,135,600 for failings when dealing with mortgage customers in arrears. The regulator said that in some cases, due to delays in finding the best solution, borrowers incurred more interest and fee charges.
“Bridging lenders should take heed,” said Alexander.
“Charging penalty rates that wipe out a borrower’s equity overnight could be seen as unfair and it’s exactly this kind of behaviour that is under a spotlight at the moment.
“All it would need is one borrower to take one lender to court or complain to the Financial Ombudsman Service or FCA formally, suggesting that penalty fees are unjustifiably too much. We could see the practice banned and, potentially, lenders being forced to pay redress or repay penalties charged in the past.”
