A new day for bridging regulation

Posted on 27/02/2015

During the recession, bridging lenders stepped forward and provided real alternatives to struggling borrowers on whom the banks shut the door.

Admittedly, as with all business ventures, the primary driver would have been mercenary, but added to that was a valuable social service provided to those in need of access to critical funding lines required for the sustenance of their own business operations and aspirations.

Thus, over the last five years, the traditional lines of separation between bridging lending and mainstream lending have become blurred.

From a regulator’s perspective, blurred lines can create instability and checks and balances were needed to address the issue of undue exposure of borrowers to an unregulated market.

Change is inevitable for progress and whilst functioning in a world of heavier regulation presents administrative challenges for bridging lenders, the change has brought with it an opportunity for upward mobility through a rebrand of the negative stigmas typically sometimes associated with the bridging community.

Perhaps the most ubiquitous and yet unfair criticism that has been levied against the bridging finance world is that it seeks to exploit desperate borrowers and in so doing levies unfair terms.

What is often overlooked is that whilst the mainstream lenders departed substantially from traditional loan underwriting criteria, bridging lenders, because they were invariably transacting with high risk borrowers, adhered to the sound loan underwriting criteria.

Ironically, the net result of this is that whilst mainstream lenders have had to undergo substantial process overhauls to meet new standards imposed by the Mortgage Market Review, the transition by bridging lenders to this new regime would be less onerous.

Therefore, whilst the high street banks may have deviated from conservative standards on responsible lending, the bridging lenders adhered to strict affordability criteria, realistic earnings multiples and high LTVs, which were essential benchmarks given their borrower profiles.

The fact that some aspects of bridging finance were historically regulated by the Consumer Credit Act would have also ensured that for bridging lenders, the focus on responsible lending was even more pronounced.

The European Union Mortgage Credit Directive for regulation of credit agreements relating to residential property, which is expected to take effect in autumn of this year, will introduce further administrative complications for high street lenders.

Similar to the MMR, the impact of the Mortgage Credit Directive on bridging lenders is likely to be less turbulent given that their residential lending portfolio was rolled out within a regulatory regime which was consumer focused.

Whilst mainstream lenders approach the new MMR and Mortgage Credit Directive regulatory regimes with trepidation, and whilst increased regulation will always present administrative and cost efficiency challenges, the historically self-regulated bridging finance world, which has constantly persevered in the promotion of its integrity, should be better poised to deal with change.

Indeed, change which places bridging lenders on the same regulatory footing as high street lenders brings with it a diversion from the superficial issues of regulatory dichotomy.

In so doing, change will bring with it an opportunity for the bridging finance world to finally showcase the success of its lending model, which has always been underpinned by sound risk management practices.