UK: Busy Lenders Monthly Round-Up - July 2017

Welcome to TLT's Busy lenders' monthly round-up. Each month we summarise the latest news and developments in retail mortgage lending and regulation.

News

UK Finance Launch

In May we reported that UK Finance was expected to launch in July.  We can now report that UK Finance became operational, actively representing the UK's financing and banking industry, on 3 July 2017.  UK Finance represents over 300 firms providing credit, banking, markets and payment related services and is the merger of six trade bodies.

Any new policies will be published directly on UK Finance's website.  However, the previous trade bodies' websites currently remain active and act as an archive of information.

The Land Registry's new Digital Street

The Land Registry has published its latest annual report.  It sets out Land Registry's intention to create a digital register through their 'digital street project' launching this summer.  It will use blockchain and AI technologies, and also software which allows the Registry to intelligently scan paper plans and overlay existing digital records. This is likely to bring substantial time savings to the registration process and pave the way for Land Registry to offer new digital services to customers.

Land Registry has remarked that local searches currently take around eight working days.  It plans to digitalise this service, meaning near instantaneous results.

Finally, Land Registry plans to expand its digital mortgage beta test programme to more users later in the year so that progress can be made towards digital mortgages backed by electronically verified signatures.

Consumer Credit continues to grow at double digit rates – BoE demands that banks respond

Borrowing by UK consumers continued its double-digit growth in May, fuelling the BoE's concerns that consumer credit is growing too fast.

British consumers owed banks a total of £199.7 billion by last month, according to new data published by the BoE, a larger-than-expected increase of £1.7 billion on April.

Although growth in mortgage debt, which remains by far the largest single component of household debt, was stable, May's rise in consumer credit was larger than the £1.4 billion growth that economists had expected.

Several of the UK's financial regulatory bodies have signalled their concerns that banks may be lending to people who will find it hard to pay off their debts.

The FCA is also reviewing lending to highly indebted households, while the PRA is examining underwriting standards amid fears that lenders are making loans to people with lower credit scores and who have previously struggled to make repayments.

Meanwhile, the BoE's Financial Policy Committee is accelerating bank stress testing of consumer credit, to ensure that banks have sufficient reserves to cope should there be an unexpected surge in loan defaults.

Car finance is rising especially quickly, a trend which "most participants believe is not sustainable", BoE staff said in a blog post last year.

In view of the consumer credit concerns the BoE has ordered banks to show they are addressing concerns about the growing lending risks.

Following a review of 20 lenders, the PRA raised concerns that some are being too complacent in their assessment of potential losses on their loan portfolios.  It now requires all regulated lenders to provide evidence that they are adequately addressing the concerns it has raised.

NRAM v Evans: Court of Appeal confirms mistake should be altered

The Court of Appeal has provided welcome clarification as to whether a mistaken discharge of a charge should be remedied by way of alteration or rectification.

When deciding, the court will need to look at the purpose behind the alteration.  To do this, the Court of Appeal has provided some useful guidance as to what will constitute "mistake".

In Evans, at the date the Land Registry processed the electronic discharge form (e-DS1), the disposition was valid.  Once the e-DS1 had been rescinded by the High Court Judge, the register could be brought up to date to reflect the rescission.  This was therefore a case of alteration and not rectification.

This will be a welcome decision for lenders: "mistake" has been defined and the court also confirmed indemnities can only be sought in cases of rectification.  Lenders should nevertheless be mindful that cases will still be decided on individual facts.  Lenders should also ensure systems are in place to ensure that where they have an "all monies" charge all of the customer's borrowings are checked when discharge is requested.

For further information, read our full article here.       

Lending

Government's proposed leasehold reforms

The Government's consultation paper, 'Tackling unfair practices in the leasehold market', notes that the number of new-build leasehold residential sales has increased dramatically over the last 20 years.

Whilst there is clearly a need for leasehold flats, developers are now under the spotlight in relation to the emergence of the leasehold house, with high initial ground rents that balloon with increasingly frequent ground rent reviews, and high fees in relation to home alteration requests.

With Brexit uncertainty, a cooling housing market and a stagnation of wages, lenders may worry about the value and/or marketability of their leasehold securities and/or their customers' ability to service loans when faced with escalating ground rents.

Conveyancers are under certain general duties in relation to reporting onerous leasehold provisions that may affect a property's marketability, but the approach is somewhat subjective. Similarly, a lender's panel valuer's duties are fairly limited in respect of reporting on leasehold provisions.

Lenders may want to consider undertaking the following proactive steps:

• Security review of existing leasehold houses to flush out or, at the very least, be on notice of onerous leasehold provisions (and where a review highlights something   onerous, checking the advice they received from the original conveyancer)
• Early contact with customers who are struggling with ground rent costs
• Review standard instructions to conveyancers in respect of leasehold provisions reporting
• Review pro-forma Certificates of Title
• Revisit lending criteria in relation to maximum starting ground rents and reviews
• Discuss leasehold reporting criteria with panel valuers

Read full article  here

Support for Mortgage Interest Loan Regulations

From 18 April 2018 Support for Mortgage Interest (SMI) will cease to be a benefit and will instead become a loan to the borrower. 

New regulations have now been published setting out details of how the new arrangements will work.  The loan will become repayable on the sale of the property, assignment of the borrower's beneficial interest or on the death of the borrower.  The government will also be permitted to charge interest on the funds provided.

The SMI loan will be protected by a second charge, signed by the borrower, and will be capped at the value of the equity.  This means that if the property is sold and net sale proceeds are insufficient to repay the SMI loan in full, the loss will be written off. 

Lenders may be asked to consent to the registration of an SMI loan as a second charge where there is already a first mortgage that requires such consent.

The change means that, in effect, customers are just borrowing money from a different source in order to satisfy their mortgage lender.  The benefit to the customer is that the SMI loan will only be repayable on sale or death, which will give the customer some breathing space.  However, it is important to note that level of indebtedness will remain the same.  This means that whilst lenders may have historically taken SMI into account when assessing the customer's affordability responsible lenders may wish to re-visit this decision in view that SMI is no longer a benefit supplementing the customer's income but a loan which the customer will eventually have to repay.

Mortgage Lenders say 'Yes' to more first time buyers

The success rate of first time buyers applying for a mortgage is sharply improving according to the latest research.  It is thought that intense competition between lenders is making it easier for borrowers to access loans.

More than two-thirds (67%) of mortgage applications made by first-time buyers were completed in the first three months of 2017, up from less than half (48%) a year earlier.

The quarterly research by the Intermediary Mortgage Lenders Association (IMLA) looked at mortgage applicants' interaction with brokers from the first point of contact to completion of the loan.  It found that 84% of applications by first-time buyers resulted in a mortgage offer, up from 70% in the first three months of 2016.  The ratio of completions by first-time buyers has improved more than that of any other segment of applicants, such as home movers, remortgage applicants and buy-to-let investors.

There are now more than 250 mortgage deals available to borrowers with a deposit of just 5% of the property value, according to figures in May from finance website Moneyfacts.  Generally, the interest rates on such mortgages are substantially higher than those offered to borrowers with bigger deposits.

Mortgage rates have fallen further in the past year.  Earlier this month, HSBC cut the rate on a two-year fixed-rate mortgage to 1.34% for those with a 15% deposit.

In April, Sainsbury's became the latest supermarket to offer fixed-rate mortgages to those with deposits of at least 10% and a reward scheme for borrowers who also shop at its supermarkets.

Interest-only mortgages and a lean towards longer mortgage terms 

Around a fifth of all outstanding residential mortgages in the UK are interest-only, according to the CML, and around 1.9m borrowers are just paying off the interest without making a dent in the underlying capital debt.

Before the 2008/09 financial crisis, interest-only mortgages were commonly issued to people who could not afford the repayments on a conventional repayment mortgage.  Lower monthly payments meant borrowers on lower incomes could get the keys to their dream home but there was an expectation that they would make suitable arrangements to pay off the capital at the end of the term.

It is estimated that 1 in 10 borrowers has no plan in place to repay the capital at term expiry and even those that have a plan may find it falls short.

While financial regulators have significantly restricted the profile of borrowers who can access credit in this way, a "repayment crunch" may be looming for those affected.

There is also now a trend towards longer mortgage terms. Historically, 25-year term mortgages were commonplace.  In a speech for the Building Society Association, Sam Woods, the Deputy Governor of the PRA, highlighted a recent trend towards longer terms and 35 years is becoming increasingly common.  This means customers are paying more over the lifetime of the mortgage and it increases the possibility that the mortgage debt will have to be serviced from post-retirement income.

Mr Woods said that whilst a longer term mortgage reduces the monthly instalments and makes the loan more affordable in the short term, this could be just storing up problems for the future. 

European banks relax lending criteria in second quarter

European banks relaxed their lending criteria in Q2 of 2017, offering increased levels of credit and more lenient repayment conditions.  This contradicted the prevailing expert view that the market would tighten as 2017 progressed, following similarly liberal lending in Q1.

This conclusion was reached by the Frankfurt Institution which surveyed 142 banks lending to both businesses and individuals.  The data shows that lending requirements were reduced by some 3% for business customers and 4% for individual borrowers in Q2.  At the same time, banks are also currently prepared to offer more generous repayment terms as they battle for increased market share.

Lenders have confirmed that competition in the market is the main driver for these changes.  Current levels of competition for commercial lending were fuelled by increased merger and acquisition, and fixed investment activity across Europe.  In addition, record low interest rates and rising property prices have contributed to the burgeoning demand for both retail and commercial finance.

Controlling low rates is one of the ECB's interventions in the continental economy.  The aim is to facilitate the movement of cash through the financial system and into the "real" economy by encouraging banks to lend, powering growth and pushing inflation towards the Bank's target of just below 2%.  This strategy has been deployed alongside the ECB's bond-buying initiative which has seen it accumulate some €1.5 trillion in assets, also aimed at kick-starting economies.

While the ECB's bond-buying initiative has attracted criticism for distorting debt markets and homogenising yields across countries with contrasting political zeitgeists, President Mario Draghi is expected to announce that the policy will continue, at a meeting scheduled for 27 July 2017.

Continuing easy access to credit and favourable repayment terms across Europe will provide competition for UK banks, especially in the commercial lending space, and is likely to influence decisions regarding access to finance in the UK going forward.

European consultation on non-performing loans and new loan securities

The European Commission has published a consultation which, firstly, looks at securitisation of non-performing loans.  The Commission recognises that if banks were able to off-load legacy assets they would be better able to focus on new lending.  The Commission envisages that non-performing loans could be dealt with by companies that specialise in debt collection.  In some EU countries there are legal restrictions on loan transfers in order to protect the debtor.  The Commission wants to consider whether an EU wide approach to enable easier transfer of loans is required.

The second part of the consultation asks whether a new kind of "European accelerated loan security" should be created.  This accelerated security would be aimed at allowing lenders to gain access/control of the security asset when the customer is in default, without the need for court proceedings.  The Commission suggests that this should be limited to commercial lending.

In the UK there is already a well-established market for securitisation of loan portfolios.  Receivership also provides an alternative to the court process to realise the security, albeit at the price of distancing the lender from the security.  As such, it remains to be seen whether any EU wide rules resulting from this consultation will have any value in the UK, particularly given the current Brexit negotiations.

Fintech

Fintech Regulation and Digital Change

The Council of Mortgage Lenders has published a research paper on digital change across the mortgage industry.  It appears that consumer expectations have been altered in many industries as a result of digital solutions putting the consumer in control.

Research shows that 60% of consumers would like to use an app to manage their mortgage and 40% would be comfortable using an app to buy a mortgage product.  The goal for lenders is to use technology which reduces the time from mortgage application to offer, which can take between 30 – 45 days.  The report goes on to list a number of technologies which will help, for instance:

• A customer hub to share data between lenders, conveyancers and intermediaries and using open banking to share data between stakeholders
• Using biometric data to verify customers' identities
• Robotic process automation and AI to complete tasks and automatically produce mortgage offers in principle

Regulation is cited as a key inhibitor of change.  However, the Payment Service Directive and Open Banking project will allow customers to take control of their financial data and share it with organisations other than their bank.  Not only will this help the mortgage application process, it also leads to new possibilities, such as apps which could suggest savings or insurance products based on an individual's habits.  Fintech companies may also develop systems to create bespoke financial products for individuals.

The paper suggests changes in the mortgage market are happening gradually and incrementally.  However, lenders will need to prevent any legacy systems standing in the way of change to retain their market share.

Focus on Scotland

Breach of Contract – Time for reform?

When a party fails to perform an obligation under a contract or performance is late a "breach" occurs.  This can be detrimental to all parties involved and can have a negative effect on the business-client relationship.  As such, it is important for a legal system to have clear and effective mechanisms in place to remedy any breach.

On 10 July 2017 the Scottish Law Commission (SLC) published a discussion paper on remedies for breach of contract .  The paper explores the current remedies available to parties in Scotland and compares the position with other jurisdictions.  It also considers remedies available without recourse to the courts.  These are efficient and cost-effective ways to resolve issues. The SLC hasn't considered this topic since the 1990's.  The paper recognises that Scotland must stay up to date with other legal systems, particularly with Britain's impending exit from the European Union.

The SLC would like the law to be simplified and modernised.  Contract law underpins all business transactions so a clear and accessible system is essential.  The consultation period ends on 6 October 2017.  We will continue to monitor any further developments.

Contributors:

Kate Hurst

Ben Hanham

Claire Pleece

Duncan Martin

Emma Finch

Catherine Zakarias-Welch

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.