The practice of back-dating interest rates has earned much criticism over the years. Yet it was only this year the sector’s standards body, the ASTL, became proactive about outlawing it.
Back-charging happens when after a breach of contract, such as a default, the borrower’s right to a promotional interest rate gets lost and the lender retrospectively applies the higher rate to the whole length of the bridging contract – as opposed to the remaining term.
Chief executive Benson Hersch said he had “felt it necessary” to expand ASTL’s Code of Conduct, which up until then merely stated members should not charge “excessive” fees. “We wanted to make it clear that members adhere to higher standards than these prevailing standards,” he said.
Hersch explained the organisation had received reports from concerned members who had come across the practice when assisting customers to exit loans. While he said he knew he could not control the practices of firms which are not ASTL members, he still hoped the new measure would get more firms to drop this approach.
Brightstar Financial director of short-term lending and development Kit Thompson applauded the ASTL for its decision to act. “Better late than never,” he said. “This practice is outdated and unethical. It shouldn’t have been allowed in the first instance.”
He added: “I am not saying that if a borrower defaults they shouldn’t be charged a higher rate of interest, but the issue is one of transparency and fairness.” Thompson explained he had come across lender contracts referring to a ‘standard rate of interest’, which was discounted for the first 12 months. This avoided calling it default interest by labeling it as ‘standard’ and was potentially misleading, he said.
Bridging lender Bridging Finance Solutions also welcomed the move as a “step in the right direction”. Managing director Steve Barber said: “The bridging sector still has a stigma of being the lender of last resort and of sharp lending practices. That does none of the professional lenders operating in the market any good and we need to move on.”
Barber suggested the practice was not widespread, however. In 11 years in the industry he had not come across it, he said. He doubted any regulated lender would resort to the those tactics. Barber said he did not think a firm being challenged by a district judge would be able to defend their case unless the scenario was specifically mentioned in the contract.
Brightstone Law senior partner Jonathan Newman agreed, although he said it was not impossible. “The ASTL can only self-regulate their members. However, if such terms are challenged in a court environment, it will become harder, but not impossible, to justify on the grounds of accepted market practice,” he said.
Newman suggested the ASTL’s statement of treating customers fairly would eventually resonate with the unregulated space. “This seems to me to be an example of how regulation and political thinking behind regulation can have a wider impact even in the unregulated space, with short-term lenders seeking to apply the same principles in the unregulated space,” he said.
For Barber the onus was now on the broker. “There will still be those who adopt sharp practice but one would hope when brokers are looking at bridging finance offers they are not just rating them by promotional interest rates but looking at the whole fee structure and how they are being charged,” he said.