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Lenders need ‘more thoughtful contracts, with greater consistency’ to avoid default problems – Hersch

by: Benson Hersch, CEO of the Association of Short Term Lenders (ASTL)
  • 09/04/2019
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Lenders need ‘more thoughtful contracts, with greater consistency’ to avoid default problems – Hersch
The bridging market is buoyant at the moment. Figures from the Association of Short Term Lenders (ASTL) showed that bridging lenders wrote more than £4bn of loans last year.

 

This is nearly 15 per cent more than in 2017 and this growth has been driven by increases on both the demand and the supply side.

This is excellent news for the sector, but it comes with a caveat – anyone can lend money, the art is in getting it back.

New lenders to the market are likely to invest significantly in product development, brand and marketing, but they also need to make sure that they invest in robust legal wording in their contracts for customers

During the excitement of launching a new lender, developing fit and proper contracts can feel a little like drafting a pre-nuptial agreement – you hope that you will never need to use it, but need to prepare for the possibility of a difficult outcome.

Lenders, therefore, need to be well prepared for borrowers who can’t or won’t repay their debt.

 

More robust termination clauses

In recent months, a number of lenders have closed their doors for new loans, often citing the competitive market squeezing their margins.

This suggests that lenders are operating on thin margins, meaning that bad debts could be very problematic.

So, it is very important that lenders take the necessary steps to protect against borrower issues and failure to pay on time.

In an article due to be published in the ASTL magazine shortly, law firm Moore Blatch, calls on termination clauses to be “more robust” so lenders can rely on them to quickly recover their security.

“This is especially true in the short term and with regards to development finance where interest rates are generally higher and when defaults can mean significant losses,” it says.

 

Standardise lender contracts

Moore Blatch also advocates greater standardisation of contracts among lenders, stating in the article: “Every loan is different, but the way the law treats loans in default is based on a limited number of case precedents.

“When designing bespoke contracts therefore, lenders are often ‘designing-in’ a greater likelihood of contractual failure should there be a problem.

“Furthermore, too few lenders consider the counter arguments from a borrower‘s solicitor when contesting the contract.”

More standardised contracts could not just benefit lenders, but also intermediaries and borrower.

As Moore Blatch explains: “Greater consistency in contracts can be beneficial for the likes of development and commercial loans and can mean a smoother process for the release and repayment of funds leading to reduced legal, receiver and asset manager fees.

“Also, if everyone is clear about the lender’s powers, then, should an issue arise, the relationships with contractors or builders can help preserve the value of the asset for the benefit of the lender as well as that of the borrower. “

 

Better contracts, better protection

Complete standardisation of contracts is unlikely to ever happen.

But more thoughtful contracts, with greater consistency between lenders could prevent many issues down the line, ensuring lenders are better protected and surveyors and solicitors can follow a standard process.

 

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