MMR 2012: Bridging hit by new regs

Sarah Davidson

October 25, 2012

The Financial Services Authority said one trade body and several lenders were concerned that the read across would have a detrimental impact on the bridging market.

It said responses given during the MMR consultation suggested that while most in the bridging industry agreed with the FSA’s aim of protecting vulnerable customers, they asked for “greater flexibility to allow for the wide variety of scenarios where bridging can be used”.

But the FSA put its foot down and said: “We do not believe our rules prevent bridging lenders from lending in a wide variety of scenarios.

“We would expect firms’ lending policy to reflect the nature of the market they are in.”

Bridging industry pundits also argued for making advice mandatory for anyone in arrears or who is otherwise credit-impaired while allowing lenders to make their own risk assessments.

But the FSA said: “We continue to believe that it is highly speculative for a customer to take out a bridging loan and expect their credit status to be repaired sufficiently to enable them to refinance to a mainstream mortgage.

“So we have retained the evidential provision MCOB 11.6.53E. Therefore accepting credit repair as a repayment strategy, without evidence of a guaranteed offer for a longer-term contract would tend to show a breach of MCOB 11.6.41R(1).”

The FSA has also clarified that extending the term of a bridging loan can be done on an execution-only basis.

It said: “Where a bridging loan is taken on a retained interest basis, an additional amount is added to the loan when the term is extended. However, this extra amount is interest on the loan that the customer has already received and is not additional borrowing.

“As long as the customer is not taking out additional borrowing when varying a mortgage contract, then advice does not need to be given.”

The FSA also confirmed that after its rules are implemented in April 2014 a bridging loan would be defined as a regulated mortgage contract with a term of 12 months or less.

It has changed MCOB 11.6.49R to clarify that given that the loan is for 12 months or less the regulator does not see a need to check on the repayment strategy during the term.

The FSA will allow lenders to consider all types of repayment strategy as long as they operate within a framework of appropriate controls set out in their lending policy.

“However as set out in MCOB 11.6.56G we will expect firms to act honestly, fairly and professionally, in accordance with the best interests of their customer, when they extend such loans,” added the FSA.

Bridging brokers

Under the final rules brokers offering bridging loans can say they offer products from a “comprehensive range of providers as long as they can demonstrate access to a sufficiently representative number”.

If they use a limited panel of lenders the FSA expects them to know their names.

Prudential rules

Bridging lenders will also be subject to stronger prudential rules meaning they will have to hold more capital on their balance sheets.

The regulator said those directly involved in bridging argued strongly that the proposal to apply BIPRU requirements to these generally smaller-sized firms is not proportionate and for many firms would mean a significant increase in the capital required.

The preference by providers of capital for subordinated loans means that firms’ ability to raise share capital would be either very restricted or very expensive.

But the FSA said non-bank lenders subject to MIPRU capital requirements are significant market participants and can cause significant consumer detriment.

And it added: “Our view is that we should therefore increase the quality and quantity of capital required for them to improve their loss absorbency, which was a key failing across the market during the financial crisis.

“The same arguments apply to bridging loan firms for holding a minimum amount of share capital and reserves, which should help a firm absorb losses whilst either continuing to trade or to prepare for a more orderly wind-down and withdrawal from the market.

“We will therefore retain the requirement that at least 20% of eligible capital should be share capital and reserves less intangible assets.

“Given this, we will include bridging lenders within the scope of the new MIPRU requirements.”

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