Penalty fees: a cautionary tale
It might sound farfetched but I think it’s a scenario we in the bridging industry should consider.
The fairness of charging penalty rates has been hotly debated in the bridging sector over the years. Some lenders, including us, charge a default rate designed to cover the administration and additional time we are forced to spend recovering the security in the event that the borrower defaults on the loan and having exhausted every other possibility of repayment.
We charge 1% a month for this default, but we also keep time sheets to justify the time we have to give to instructing and managing lawyers, bailiffs and all the other admin it takes to enforce a possession.
In our professional view there is nothing wrong with this. It is perfectly reasonable to put in place measures to cover our costs. But lenders should not be unjustly enriched by a borrower’s default.
And there are bridging lenders, including some of the bigger outfits, which we understand are charging penalty fees as much as double or even three times the contractual rate. The fact that headline rates are dropping means lenders are being forced to find ever more ingenious ways to make a big enough margin to keep delivering returns to their investors.
The exorbitant rates being charged look excessive to me. Even more so when you consider that there are lenders who will backdate those charges to the start of the loan, incurring an instant and considerable fee payable if a borrower goes over a six-month term by a day.
Unfair fees and charges have been increasingly in the news. In June, payday lender Wonga agreed with the Financial Conduct Authority that it would pay compensation of over £2.6m to around 45,000 customers for unfair and misleading debt collection practices.
Just weeks ago, it was revealed that 25,000 consumers have signed up to a Which? campaign to “stop sneaky fees and charges” after millions of people using unauthorised overdrafts complained the fees and charges were too high and unfair. That campaign calls for an end to fees across the financial sector that are “hidden, excessive or make the total cost difficult to understand and compare”.
Bridging lenders should take heed. Charging penalty rates that wipe out a borrower’s equity overnight could be seen as unfair and it’s exactly this kind of behaviour that is under a spotlight at the moment. All it would take is one borrower to take one lender to court or complain to the Financial Ombudsman Service or FCA formally, suggesting that penalty fees are unjustifiably too much. We could see the practice banned and, potentially, lenders being forced to pay redress or repay penalties charged in the past.
I don’t think that because bridging lenders deal with property professionals in the main is a get out of jail free card either. Buy-to-let lenders aren’t subject to the same regulation as residential lenders but they don’t go around charging these sorts of fees.
Given how widespread the practice is within the bridging sector, it’s not too big a leap to entertain the idea that this could escalate into a class action. The payment protection insurance mis-selling scandal has now stacked up redress costs to banks well in excess of £20 billion.
Perhaps the only reason customers who’ve been slammed with extortionate charges in our market in the past haven’t taken lenders to task is because they’re worried the legal costs would outweigh the cost of placing their loan somewhere else. But all it would take is one person to set that precedent.
Most bridging lenders are funded by wealthy private individuals or private equity funding lines; the capital available to them within their businesses is actually fairly limited. Recouping any monies from investors to pay redress to borrowers if a judge found in their favour is just unimaginable. The chaos that would ensue if penalty rates were ruled excessive would be severe.
A market with around a hundred bridging lenders, of which maybe 10 or 15 do the lion’s share of business, would overnight become a market of far fewer.
While this could sound like scaremongering for the sake of it I genuinely believe it is our responsibility in the bridging industry to stamp out questionable practices such as this. We have an opportunity to set a benchmark; let’s not leave it to the customer, the lawyers or the FCA to force us to do the right thing.