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The FCA first indicated its views towards credit repair last year when it collated the MMR programme. While referring to regulated bridging loans, it stated: “…where a bridging loan is sold for credit repair purposes, unless the customer can provide evidence that a mainstream lender will offer them a mortgage at the end of the bridge, we will consider this to be a breach of our rules.”
B&C asked industry professionals on whether they agree with the watchdog’s adverse inclinations towards bridging loans being used for credit repair.
Some in the industry questioned the problem of using a bridging loan for credit repair purposes when the predecessor’s exit route was going to be via the sale of the property anyway.
Terry Markham of The Funding Operation stated he agreed with the FCA because credit repair gives a potential for people to use short term lending to resolve short term problems, where he stated its use could be “taking advantage and delaying facing the problem,” adding that it “leaves people with large loans, which they can’t find their way out of.”
However, Terry added that if the property was to be genuinely sold, “then it is a reliable exit route.”
Marc Turner, Head of Development at Finance 4 Business commented on the matter: "I totally agree that clients looking to use bridging finance know exactly what they are getting into and how it can compound their problems if not used correctly.
"All avenues should be looked at and exhausted before looking at short term finance as a solution to credit repair, in addition the client needs a complete and full appraisal of the costs involved as these could negate the benefits of the short term finance."
Marc added: "Finally all advisers should ensure the lender is fully aware of the reason for the finance and a full exit strategy is in place and agreed by the exit lender. In essence all parties should be fully aware of all aspects of the finance being structured and willing to agree, more importantly the client needs to understand the cost involved, be able to work within the required timescales and be aware of the risks if things don’t go to plan."
Marc stated: "it is more important to ensure this type of technical funding is properly boxed off and agreed by all parties and is explained to the client in a fully transparent manner."
Stephen Burns of Adapt Finance disagrees with the regulator, where he argued that “in certain circumstances, it may be the only way to protect the client, or assets.”
“The continued evolvement of the 'champion lenders' now offering term loans, provides a much needed lifeline for a borrower who may have suffered during the recession,” he said.
Although, from his perspective in order for credit repair to be a viable reason, the broker or adviser must ensure the product offered will not create any ongoing difficulties to the client.
Stephen added: “As long as all considerations are taken into account and affordability remains, this offers a viable option, whilst the main banking community are not willing to lend to this sector.”
Kit Thompson of Brightstar Bridging also doesn’t “necessarily agree” that bridging should be ruled out as a viable lending solution in a credit repair situation, “providing that the outcome for the client is better than the alternative.”
Kit gave an example, involving a client with equity in their home, who is faced with mortgage arrears and potential repossession.
“In this instance, my understanding is that the FCA would say bridging would not be suitable,” he said, adding “I would argue that by [using] bridging to take out the existing mortgage, including paying up the arrears, and allowing interest to be rolled-up until completion for a maximum of 12 months, would be good advice, for someone who otherwise would be faced with repossession and being made homeless.”
However, Kit agrees with the FCA “if the client is bridging only because they are unable to take a mortgage…bridging should not be used as a ‘stepping-stone’ back to mortgage, as it is too high risk.”
Richard Deacon of Masthaven Bridging Finance declined to comment.
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