The Financial Intermediary and Broker Association (FIBA) said it would start publishing lenders’ rates in its online directory to provide greater transparency about facility extension charges that are imposed by lenders.
The Association of Short Term Lenders (ASTL) has supported this position, saying that its code of conduct for members was amended in 2017 to ensure all lender members applying an alternative higher interest rate, such as the default of a loan, must make this clear and transparent in all of their documentation.
This transparency is important.
Default rates act as an incentive for a borrower to investigate alternative options as they approach the end of a term. Customers can only make fully informed decisions when they are presented with all of the information.
In the current market, with properties taking longer to sell because of Brexit uncertainty, this information is relevant to more borrowers.
Sales taking longer
Our experience is that more than half of borrowers plan to exit through a sale of the property and transactions are currently taking much longer to complete and falling through more frequently.
It’s at this stage, when it looks like an exit through a sale of the property is unlikely within the timeframe, that a re-bridge is needed and early communication between lender, broker and borrower is required.
That’s why most responsible lenders and brokers will keep an open dialogue with borrowers throughout the term, requesting marketing updates and progress reports at least every three months following drawdown of the loan.
That way, if there is an issue, they can agree a revised marketing strategy, such as a reduction in asking price, or even discuss an alternate exit strategy such as refinance, early enough to avoid default interest.
Regulated vs non-regulated
There is disparity between regulated and non-regulated lenders in their approach to default interest charging and how willing the lender is to work with the borrower to avoid default rates and repossession.
Lenders in the non-regulated space are generally less tolerant of borrowers going over the initial term and more willing to enforce loans in default.
This is not a surprise, given that these lenders are not governed by the Financial Conduct Authority (FCA).
But there is room to improve default handling in the non-regulated lending space and all lenders, whether they are FCA regulated or not, should adopt a fair Treating Customers Fairly (TCF) policy. Many do, but in my opinion an equal number do not and those that do not need to do some work here.
This debate about default rates is a timely reminder to be proactive in contacting your clients throughout the term of their loan, particularly in the current market.
If your client is struggling to exit through a sale, consider partnering with an expert in this sector to help find the right refinance solution for your client.
With proper planning and partnerships there is no reason why your clients should have to endure the expense of paying default rates.