It is estimated that up to 30% of short-term lenders* support dual representation and its appeal is continuing to grow. (* Source: ASTL, October 2018).
Although it’s not new, the desire to speed up the loan process, cut costs and present a more attractive funding proposition is giving grounds for a resurgence of interest amongst short-term lenders.
However, Brightstone Law is warning of the risks of dual representation. While it works in the wider mortgage market, because the terms are standard and the borrowing cheaper, it has the potential to increase risk where disputes arise in areas such as undue influence, mistake and onerous terms.
Jonathan Newman, pictured, Senior Partner comments:
“Dual representation has been around for some time and has had some traction in the most vanilla of cases and in a particular sector of the market, which is more about volume, than complexity; more about process than delivery. Certainly, cheaper to transact, but anecdotally, the customer experience has not been painless.
However, the short-term finance market is specialist because often the transactions are difficult, complex and require tenacity to get over the line. They often contain elements of restructuring and this is why often they take extra time to complete.
It’s often said and written that the most common reason for delay, is the inexperience of the borrower’s solicitor. But this was not the finding in research recently undertaken by the Brightstone Law Property Finance Team, which looked at the true reasons for increased completion times. There were solicitors who were lacking in responsiveness, but equally there were many occasions where credit teams took too long to make decisions, funding teams took too long to fund.
In my view, dual representation appears to mend a problem that does not exist in the short term lending market. It also poses some real threats to bridging deals. It involves an imposed legal panel, increasing the likelihood of solicitors taking on clients they do not know and have never met. Knowing their client, based only on documentation supplied and phone calls may lead to increased potential for imposter fraud, at a time, when identity fraud seems to be on the wane in the bridging market.
Furthermore, after many years spent recovering lender funds, in disputed, highly contested situations, the single most influential document has been the ILA certificate (the certificate of independent legal advice). This document evidences that the borrower has been separately represented, by a lawyer of his choosing, who has acted and been paid to act, represent and explain the nature of the transaction, the detail of the documents and what happens if things go wrong.
More often than not, once produced, the ILA can even at protocol stage, have the practical impact of avoiding trial altogether. The borrower’s issues about transaction terms, their understanding and acceptance, then becomes an issue between the borrower and their advising solicitor, rather than the lender. That can and does save wasted time and cost, accelerating recovery by time periods measured in years.
The regulatory trend over the last few years has been to move away from execution only, to advised sales. Advice is clearly considered to be necessary and proper. Advice which is not truly independent, might be deemed no advice at all.
From the lender’s perspective, the most important critical issue in any loan transaction is the validity of the mortgage, its recoverability and enforceability. Why would lenders choose to dilute one of the most key important platforms for enforceability, just to gain a perceived improvement on speed and cost saving for its customers?
From an intermediary’s perspective, if speed or customer experience does not improve, how does that improve their brand and reputation? Also consider the long-term implications for your business as an arm’s length introducer who is concerned about customer journey and the integrity of the transaction.
Behind it all, is the customer. Is it really in their genuine interest to take shortcuts with their legal advice, their choice of practitioner, justified by the interests of the funder or intermediary in speeding completion times?”
Brightstone Law has outlined the key benefits of an ILA in a dispute:
- A lender is entitled to rely upon it, to rebut any suggestion that one borrower is under duress, or the undue influence of the other.
- Unfair Credit Relationships are increasingly the line of attack on fairness and reasonableness. These claims are decided on a number of factors. An imposed lawyer in short-term finance, depending on a particular factual matrix, could amount to an adverse factor in the courts’ decision when looking at the credit relationship in the round.
- As mortgage mis-selling remains a claim industry cloud on the horizon, true independent legal advice can also come to the aid of the intermediary, if faced with a parallel claim for poor advice said to be exclusively relied upon