Crunch time for secured loans?
If handled correctly, as with the non-conforming sector, we could be on the brink of a major rehabilitation of the secured loan and second charge industry. If the industry cannot get together and make its voice heard, however, secured loan providers and intermediaries could be on the receiving end of tough legislation that could make mortgage regulation look soft by comparison.
In the face of growing criticism from the national media that many borrowers cannot afford the secured loans they are being given, the industry is also awaiting legislative reviews by the Office of Fair Trading (OFT) in the UK and a Europe-wide consumer lending directive by the European Union (EU). Secured loans will also be affected by the outcome of the OFT’s investigation of payment payment insurance (PPI), in particular the controversial single premium policies that can account for a major chunk of income for loan intermediaries and providers.
Fighting its corner
In an attempt to fight its own corner against proposed changes, the secured lending sector announced the formation of the Association of Finance Brokers (AFB), a new trade body set up by the Corporation of Finance Brokers (CFB), which will now join the Association of Independent Financial Advisers (AIFA) family alongside the Association of Mortgage Intermediaries (AMI).
Speaking after a meeting to agree the formation of the AFB, Steve Walker, chairman of the CFB, who will now take a place on the board of the AFB, said that secured loan brokers saw a synergy with their line of business and the work of mortgage brokers. He said: “The key thing is that brokers wanted an alliance with AMI and I am sure it will put the secured broker industry on the map. It will be good for AMI and AIFA members too as they will get the opportunity to improve their understanding of what we do.”
Rob Griffiths, associate director of AMI, said members of the AFB would receive the same level of support as AMI’s broker membership. He explained: “We are delighted the membership of CFB has voted in favour of the strategic alliance with AMI.
“The AFB will give secured loan intermediaries a high profile, effective trade body while also providing members with a wealth of information to enable them to build their businesses. This is a very exciting development, and it will be through the strength of our members’ support that we will be able to deliver clear benefits to them.”
Griffiths said work would now begin to schedule a list of policy priorities for the forthcoming year, plus a recruitment drive encouraging intermediaries to join the AFB.
One of the key priorities for the AFB must surely be to address the poor public perception and bad press that the secured loan and second charge sector has received over the past few years. This follows the growth of direct loan companies and their widespread marketing, particularly through satellite television and tabloid newspapers. Much of the emphasis of these direct operations is debt consolidation for borrowers trying to manage a number of different debts, such as mortgages, credit cards and personal loans. Many of the loan companies also promote their willingness to lend to people with defaults or CCJs against them.
Debt consolidation is marketed as an effective way of reducing monthly payments on a number of different debts by paying them all off with a single new loan, which would have a single lower monthly repayment. However, critics point out that although the monthly repayment may be lower, the interest rate on the secured loan is usually higher and as the loan will probably be spread out over a longer period of time, the borrower could end up paying much more in the long term than they would on their previous collection of debts.
It is the sale of PPI that has proven the most controversial aspect of the secured loans industry, an issue it shares with the mortgage sector. However, an investigation carried out by the Financial Services Authority (FSA) found examples of poor PPI selling practices were much more prevalent outside of the mortgage sector, particularly among secured loan brokers and retailers offering credit facilities. This sparked a super complaint by the Citizens Advice Bureau (CAB) that is now being investigated by the OFT.
The CAB waded in last month with its Deeper in Debt report, which stated that of the one and a quarter million people that contacted it last year for debt advice, the average amount they owed was more than £13,000. According to the CAB, this works out at 17.5 times their monthly household income and would take them on average 77 years to pay off at a rate they could afford.
There is also a concern that the consumers most likely to take out a secured loan will not be sophisticated in their understanding of financial products and may not be aware of options such as a remortgage, or that their home is at risk with a secured loan.
Home mortgage brokers believe many secured loans and second mortgages are unnecessary as homeowners would be better off getting a remortgage and consolidating all their debts into a bigger homeloan, which usually has a lower interest rate. However, even mortgage brokers admit there are circumstances when secured lenders are more suited. If, for example, a borrower has missed payments on a credit card or personal loan, but has kept up with their mortgage repayments, the defaults would count against them if they were to remortgage. In this case, they would be better off staying with their existing cheaper mortgage and take out a loan for their other debts as the overall cost would be lower.
Secured loan brokers point out that, contrary to widespread public perception, their products are regulated by the OFT, although currently only up to a maximum loan of £25,000. This ceiling is likely to be increased, but many in the industry feel secured loan and second mortgages should be regulated by the FSA alongside traditional mortgages. Many loan brokers believe it was an anomaly that secured loans were not regulated under the original mortgage legislation, a feeling that has been exasperated by the belief that less scrupulous mortgage brokers who did not want to be regulated, or failed the regulation process, simply moved in to the secured loan sector, where current rules are believed to be less onerous.
Many secured loan brokers actually want their industry to be regulated by the FSA, believing it would help improve the image of the sector and raise awareness of the facility as a valuable financial tool.
Direct loan broker Freedom Finance Group, for example, has a home loan wing called Freedom Lending, and the company says that ideally it would like to address a borrower’s needs in a holistic way, offering consumers the most suitable loan for their individual circumstances, whether that is a secured loan or a straightforward remortgage.
However, as the different types of loan are regulated by different entities, the company also has to have separate compliance departments to oversee the marketing and processing of secured loans and mortgages. Freedom Finance says it has proved virtually impossible to advertise a loan service that offers borrowers the widest range of loans and mortgages while staying compliant.
Freedom Finance not only believes this gives mortgage brokers an advantage when it comes to remortgages, it also prevents borrowers having access to a ‘whole of market’ solution for their loan needs. A spokesman for Freedom Finance Group explains: “We take the view that secured lending should be regulated by the FSA because it will provide loan brokers with a level playing field and help eliminate any remaining cowboy brokers.”
As a result, Freedom Finance has put its weight behind the formation of the AFB as it believes having such an organisation is the only way that the secured loan sector can input into the debate on legislation, at both a UK and EU level. If the views of the loan industry are not made public, then many insiders believe that regulators will adopt a knee-jerk approach to the sector and bring in draconian rules, such as the complete banning of single premium PPI.
The Freedom Finance spokesman continues: “To date there has not been a trade body which has effectively represented the views of loan brokers and lobbied on their behalf. There have been lots of issues raised, but no co-ordinated response from loan brokers, and they need a voice. That’s the Association of Finance Brokers is so important.”
And the company points out that there is a precedent with the non-conforming mortgage sector, where lenders took steps to change the image of the marketplace and, actively worked with the FSA to develop useable regulations, creating the foundation for the modern specialist lending market. The spokesman concludes: “The secured loans market is at the same stage of development that the non-conforming market was at five years ago.”
Under his auspices as director-general of AIFA, Chris Cummings will play an important role in setting up and recruiting members to the AFB. He says that there is already a major crossover with the needs of mortgage brokers and that of secured loan brokers, as research carried out by AMI found that many mortgage intermediaries have started offering advice on secured loans.
According to Cummings, research among members of AMI found that 44 per cent were already offering advice to their clients on secured loans and second mortgages, with the number rising to 66 per cent of brokers planning to offer this sort of advice next year. The research also revealed that 63 per cent of brokers questioned would also use AMI for advice on secured loans if it were made available.
Cummings also sees parallels between the issues secured loan brokers face and those that AMI has tackled on behalf of intermediaries. He told Mortgage Introducer: “The second charge and secured loans market is increasingly being regulated, with payment protection reviews and wider EU reviews. Brokers are being trammelled under this regulatory pressure, so it is important that the professionals in this sector have a trade body to represent their needs.”
He also believes that the AFB will have to address the reputation of secured lending, but is confident that it is a task that the new body will be equal to. Talking about initial discussions with the AFB’s forerunner, the CFB, about the new organisation joining the AIFA family, Cummings says: “We have been upfront about the need for good professional standards. Yes, the industry has been criticised, but the reputation has improved and the AFB will continue to do so via good standards for brokers and consumer education.”