I am regularly approached by both borrowers and lenders regarding the regulatory context of bridging loans. It is, admittedly, a complex issue.
Since March 2016, first charge and second charge bridging loans are regulated if the security subject to the charge is property used, at least 40% plus, for residential purposes, where the occupants are the borrower, and/or their immediate family of close relatives. Property actually is land; its not just the house. The borrower has to be a ‘private person’ and meet the definition of a Consumer (defined under FSMA (the ‘Rules’)). That is the case unless the purpose of the loan is, ‘wholly or predominantly’, for business purposes.
Immediately we can see there are potential problems. Wholly or predominantly must be 50% plus. And, what constitutes business purposes? Is it clear? What did both parties understand the true purpose of the bridging loan to be?
What is not always clearly understood by all parties is the following. A bridging loan by its very nature is either a Regulated Mortgage Contract, or it is an Unregulated Mortgage Contract. There are different variants of bridging loans, which carry exemptions and/or exceptions, but by and large, most of the cases that I see are ‘vanilla’ bridging loans, and the loan is either Regulated, or Unregulated.
Unfortunately, both lenders and borrowers sometimes attempt to blur the boundaries. Some lenders designate the bridging loan was Unregulated, where it is not. On the other side of the same coin, some borrowers take bridging loans that are Unregulated, and later claim that the loan ought to have been regulated. Sometimes they are right. But, disputes arise, often, over this issue. The regulations are however clear, once you know what you are looking for, and once you have spent 5 years plus looking over the very considerable regulations that apply.
In short, a lender that is not Authorised (as defined) cannot provide what is by definition a Regulated loan. I have seen many cases of this where the lender has tried to define the loan as being Unregulated, by contriving it to be Unregulated. Lending a Regulated Loan is a Regulated Activity. The lender HAS to be Authorised to provide it. If its not, the loan might not be enforceable – there are huge consequences. Similarly I have had cases where the borrower claims that the loan should have been Regulated, not Unregulated. Reasons are provided why this ought to have been the case.
Underlying all of this is the manual (part of the ‘Handbook’) that provides protections for those that have taken and provided Regulated Mortgages. Its called ‘MCOB’. It provides significant protection for Consumers if or when things go wrong. If its on your side, its incredibly helpful.
There are other potential protections in place for Consumers. One is the right to claim that an ‘Unfair Relationship’ existed between the two parties.
I spend much of my time helping, advising, writing reports, and standing up in court to help judges understand the rules and Regulations. I have been doing this for 14 years. If you need my help, get in touch.