"We are seeing an increase in more complex, disputed litigation, with borrowers hoping to pick holes in the circumstances around their original loan agreement."
My view of the current period is that we are now entering a very interesting period of legal long covid, particularly for the bridging market. After many months of deferred enforcement action and increasing loan balances, many borrowers have woken up to the realisation that their equity has been eroded and, in many cases, they have nowhere to go. Now that lenders are recommencing enforcement action, these borrowers now have a decision: fight or flight – and many are choosing to fight.
We are seeing an increase in more complex, disputed litigation, with borrowers hoping to pick holes in the circumstances around their original loan agreement. This is clearly frustrating for lenders, but it can also spell bad news for brokers.
In one recent case, the borrowers, who had taken advantage of the business use declaration to release funds for business purpose, argued this was not in fact the case, and notwithstanding their own signed declaration, they knew, broker knew, and lender knew, that funds were for personal, consumer use. It followed therefore that their loan was, in reality, regulated. Absent from the correct formality, the loan was unenforceable.
Their case failed, thankfully, but it serves to demonstrate that desperate people will attempt to pick holes in any process or document they can, to the extent of denying the veracity and integrity of their own statements and declarations.
The learning here is that brokers and lenders need to ensure their enquiries and processes are well documented. Proper legal advice is a must and increased diligence in this environment is much needed.
One particularly hot area is that of secret and half-secret commissions. This is a re-emerging and recurring issue in unregulated lending as a result a recent well-publicised court judgment and has financial and regulatory significance to lenders and brokers. Commissions, secret and half-secret, fiduciary duties, bribes and the like are the stock in trade for claims companies, lawyers and campaigners. Permissions, reputations and money are all at stake.
The precise way in which brokers are remunerated by the lender varies between lenders and intermediaries. It can often be “creative” and sometimes opaque; the very nature of what is what is and what isn’t a commission can be open to debate. The precise scope of a broker’s/lender’s legal duty to its customer is now being defined by the courts, and lenders and brokers need to ensure that the process reflects the current state.
Make no mistake, at the heart of the issue, is the customer’s legal right to know, understand and consent to who is being paid what by whom in their transaction. It is, say the courts, only then that the customer can reach an informed decision as to whether their broker is acting in best interests.
This isn’t a straightforward matter, but it is one that is growing in momentum. Again, brokers and lenders are well-advised to seek expert legal help in this area to future-proof against claims in the future.
Brokers beware – borrowers are taking to fight or flight. Now is the time to batten down the hatches.