The recent publication of the FSA’s annual Retail Conduct Risk Outlook (RCRO) paper details some of the concerns the regulator perceives surround bridging finance. The RCRO, which is designed to portray the FSA’s “view of where the potential dangers lie in the next 12-18 months”, addresses firms directly with the aim of helping them to “...understand the landscape you are operating in and to take action to monitor and control the relevant risks. The aim is to ensure the risks (as set out) do not lead to poor outcomes for consumers”. So how do the MMR proposals for more stringent lending measures connect to an increased risk of fraud?
A potential fraud concern has been flagged by the regulator as a result of the proposed Mortgage Market Review (MMR) reforms. The FSA said: “While the proposed MMR reforms are intended and expected to reduce risks to consumers from poor lending and selling practices, there is an emerging risk that the introduction of more stringent standards for responsible lending and evidence/record keeping around affordability, may mean that some firms turn instead to the inappropriate use of other products.” Specifically, buy-to-let loans and the possibility of inappropriate sales of bridging finance.
The paper continues, “We are already aware of this type of issue in the current market, and we are concerned that it could grow, especially as these contracts are usually more expensive and can appear more profitable to lenders and brokers (although there are of course financial risks for firms in writing this type of business).
“Firms on the fringes of the industry may be incentivised to develop and market products that fall outside the scope of our regulation. We have issued consumer warnings where we have had concerns about innovative products in the past and will be willing to take similar and other actions in response to any consumer risks in the future.”
Ray Cohen, compliance expert and owner of Jackson Cohen Associates, commented: “Whilst there isn’t anything that will change on what is and isn't regulated what will change is the ability to demonstrate affordability.
“Firms want to lend so may not be looking at the rules as closely as they should. This is not only a problem for long-term lending, but for bridging too.
“If someone can’t afford a long-term mortgage they may choose to try to go down the buy-to-let route which involves looking at rental income for affordability and then move in rather than rent the property out, which means that a lender may be writing a loan as non-regulated when in reality it should be regulated.
“Also, if an applicant claims the loan is for business purposes as a second charge loan on their residence it will fall outside of CCA regulation. Some lenders facing a pressure to lend may not ask enough questions to ensure that the loan actually is a business loan.”