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Second charge lending: How we got here – Robert Owen

by: Robert Owen, director, mortgages and bridging, United Trust Bank
  • 18/08/2016
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Despite the year being in the name, the Consumer Credit Act 1974 (CCA) was actually introduced over a few years. Robert Owen of United Trust Bank examines the milestone events in the seconds market over the last 40 years, shaping the market we have today.

The CCA positioned second charge lending along with unsecured forms of credit such as car loans and credit cards, which were the most common other forms of borrowing at the time.

The documents were very prescribed and the penalty for making errors with the process, documentation or the APR could have meant that the loan was unenforceable or even void. For this reason, first mortgage lenders would often set a high minimum loan size to ensure the mortgage could not fall within the realm of the CCA.

During the 1980s, the loosening of credit controls and deregulation of the financial services marketplace, the Big Bang, led to an explosion in lending. New ‘centralised lenders’ appeared and applicants no longer needed to save with their building society for over six months to obtain a loan.

During this time we saw the growth of the national broker and four lenders took dominant positions in the market – UDT (Endeavour Personal Finance), Cedar Holdings, Sterling Credit and First National Bank.

However, in September 1988 came the withdrawal of multiple MIRAS offerings (Mortgage Interest Relief at Source) which pushed house prices up by 20% before the summer as buyers looked to secure the hefty tax break before it disappeared. Following the race to complete before the September deadline, the market dropped off a cliff and continued downhill for several years afterwards.

The recession severely affected the market. Lenders concentrated on arrears management. A number of the larger brokers closed their businesses and others slimmed down. However, from 1993 confidence started to return, helped by lenders such as Kensington who provided a lifeline to many people coping with the effects of the recession.

In the second charge market, master brokers such as Ocean, Norton, HFS, Central Trust and M&G built strong brands through national advertising. As the 2000s progressed, mortgage lenders started to offer an array of products from high loan-to-value to self-certified products.

Second charge lending grew quickly and FISA, the standards body set up by lenders and brokers, played an important role in self-regulating the growing industry. Loan adverts were monitored and compliance visits undertaken by Jim Harper and the team. The important Borrower Information Guide provided key information for the customer.

More recent change has come in the form of the Mortgage Credit Directive (MCD). In the UK the MCD has a limited input on the first charge mortgage market, however it moved second charge products into the mortgage sector.

Unlike first mortgages, under the CCA the lender does not make an offer to the client, they invite them to take out the loan by signing the credit agreement after a consideration period has been completed. The lender will then underwrite the loan and, if they decide to do so, issue the funds. Following the MCD changes, this approach has changed to the one that is familiar to the mortgage market. The advice provider issues a mortgage illustration (ESIS) and the lender issues a binding offer after the loan has been fully packaged and underwritten. Then, if accepted by the customer, completion will follow.

A previous issue was the master broker having to insist that the introducing broker did not speak to the client as this would endanger the ‘no contact’ consideration period. This is no longer the case and contact can be maintained throughout the process which is far better for the customer anyway.

The biggest change though is that the intermediary will be responsible for providing their client with advice; analysing the client’s current position, considering what their goals are and recommending the most suitable option. Many intermediaries will take this change in their stride, others may take a while to get up to speed with the new rules, the increased responsibilities and the wider range of financial products on offer.

I’m confident that the customer will benefit from better quality advice aided by more innovative products from lenders, ultimately resulting in a stronger market and better customer outcomes.


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