B&C Investigates - Upfront fees

B&C Investigates - Upfront fees



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To cover the costs of all professional services spent issuing a short-term loan, clients should anticipate paying additional charges to all parties involved in the deal.

These fees are continually commanding the spotlight, owing to the significant grey area surrounding how and when they may be levied.

 

In particularly, up-front or application fees are an issue of considerable debate. This type of fee is often charged to the borrower prior to the funds being issued to cover the initial costs of assessing the clients’ suitability for the loan.

Described by one of our sources as a “hot topic” in the bridging market, B&C investigates the industries’ view of up-front fees, the level at which they should be set, and if there is a place for them at all in a bridging situation.

Our source explained how application fees are now common in the regulated mortgage market. However, he observed: “The bridging market works in a different way, partly because loans tend to be tailored to individual circumstances.”

He identified the main debate surrounding upfront fees: “Should it be a flat fee, a percentage of the loan requested or relate to the complexity of the case or is this just a ruse to charge more? And, should it be refundable?”

Problematically, the Consumer Credit Group newsletter, published by the Office of Fair Trading in 2011, highlighted: “…a number of businesses in the sub-prime, unsecured credit brokerage market, have business models that involve taking upfront fees for a service they are unlikely to provide.”

With this in mind, we asked the short-term industry for their opinions…

Emphasising the underlying need for this fee, Arron Bardoe, Director at Temple Capital Finance Ltd, observed a significant challenge some clients pose for industry professionals: “Many go direct to their current bank once they have received the offer from the broker and negotiate better terms once their bank sees someone else is prepare to lend and all the hard work has been done.”

He continued: “…it is prudent to gain some financial commitment from a client at the start of the transaction to cover at least administrative charges and travel costs and a reasonable expectation of the time involved.”

Arron added that brokers’ may need to prioritise a bridging deal above all other cases within a short deadline and compensate this time with such fee which “…could have an impact on revenue from other cases and may require calls and enquiries are addressed outside normal business hours.”

Yet, he believes: “For bridging lenders, this is their core business and so the cost tends to be included in the interest rate and higher fees involved. In addition, the competition in the bridging market continues to increase with little scope for each to distinguish themselves above others, so the justification for such charges must be balanced against winning the deal.”

Justification of this fee on the merits of each case is supported by Mark Posniak, Head of Marketing and Operations at Dragonfly Property Finance. He said: “There is a place for upfront fees in the market but they should not be used frequently and only used in extreme circumstances and should always be refundable if the lender pulls out of the transaction.

“The cases in which we do apply an upfront fee are often large and complicated and require a very quick turnaround time requiring us to shift our focus over a very short period of time and allocating relevant resource accordingly. However, if we cannot perform the initial offer, we will always refund our client.”

He emphasises: “Upfront fees are not very commonplace from our side and we only charge this fee on around 1% of all the loans we issue.”

Similarly, specialist short-term lender, Omni Capital, only charge this fee where absolutely necessary.

Martin Gilsenan, Sales Director at Omni Capital, said: “Typically, this includes deals involving especially large sums of money or requiring specialist legal work, such as development finance or where off-shore companies with unusual or particularly complex structures are involved.

“Without the benefit of this safety net, lenders would be less-inclined to devote considerable, and expensive, resources to deals that, for a variety of reasons, offer the prospect of falling through at the last minute.”

Yet despite this, some lenders take a more critical view of upfront fees. James Bloom, CEO at Regentsmead said: “We do not charge any fees until a formal offer has been issued. Borrowers should ideally steer clear of lenders who charge an upfront fee. Advance fee fraud is on the increase and borrowers should be very aware of this.”

He added: “It is tempting to charge upfront fees but we shy away from them so as not to get tarred with the same brush as unscrupulous lenders. In an ideal world, we would be paid for all the time we spent but we don't believe that is practical.”

Following a similar stance, Duncan Kreeger, Chairman of West One Loans, said: “Borrowers are often in a stressful time-sensitive scenario and the last thing they need is a demand for fees on a loan that may or may not happen. West One Loans and our legal partners do not get paid a penny unless a loan completes. The only fees our borrowers would incur would be from our third party surveyors assessing the property and this is made quite clear at the onset.

“The preliminary work we undertake for our clients is an investment we are prepared to make as a sign of good faith. We are committed to raising the bar on our industry…”

However, Martin Gilsenan stresses that full disclosure to a potential borrower is key within any charging structure. He said: “It is unacceptable for up-front fees to be anything less than wholly transparent, or to be used simply as an alternative income stream for lenders. Such practice will not be permitted for long by an increasingly alert regulatory regime; nor should it be tolerated by anyone with a long-term interest in the future of short-term lending, whether they are a lender, intermediary or trade body.”

Associations’ View:

 

Jonathan Newman, Chairman of the Association of Bridging Professionals (AOBP) recognises concerns about up-front fees, however, believes “…these are justifiable where significant cost and time expense is required to take an application from inception to completion, during which time there is no contractual certainty.

“From a consumer point of view there is a nervousness that notwithstanding the payment of the fee, there is no contractual certainty that the lender will ultimately provide the funding.

“The AOBP view is that responsible lending guidelines and practices are followed at all times. Upfront fees should be at sensible levels and only in cases where the loan application has been received and offered with a genuine intention/ ability to complete the funding should the application meet valuation, title, and underwriting requirements.

“In some cases I have seen lenders contract to reimburse upfront fees in the event that they later withdraw, which to me appears a reasonable approach to the issue.”

Adam Tyler, Chairman of the National Association of Commercial Finance Brokers (NACFB), offered his thoughts: “Combating Advance Fee Fraud was one of the main reasons the NACFB was set up and over the years before this latest recession, we had virtually eradicated this from our industry.

“Whether it is a broker or lender, charging excessive fees whether up front or overall is clearly something that should be eliminated from the industry. However, there has to be some form of appraisal fee in place to cover the initial amount of work spent evaluating a case.

“In straight forward deals, it may not be necessary to charge a fee at all. I will usually be able to tell within 10 minutes of looking at a case whether the deal can be done or not, in such instances there is no real need to charge this fee.

“The NACFB has a Code of Practice for brokers’ in respect of upfront fees. For mid-range deals, the maximum fee is set at £495. For lenders this may be more due to much higher overheads.”

Adam stresses that a fair charging structure is at the crux of this issue. He added: “If we find there is a breach of our Code, we have powers of sanction with the ultimate penalty; the broker can be expelled from the NACFB, leading to a negative reputation across the industry.”

Providing a word of warning to those who may be charging excessive upfront fees, Adam drew our attention to a notable case law example, Wilson & Anor -v- Hurstanger Ltd (2007), which resulted in the lender having to refund unjustifiable fees.

The Association of Short Term Lenders (astl) are currently reviewing this issue, and Chief Executive, Adrian Bloomfield, offered the astl’s position: “Currently it is considered that upfront and/or commitment fees must be transparent and proportionate and if applied they should intend to cover costs and not be a source of additional revenue.”

And, reinforcing the importance of this issue, Adrian added: “Upfront fees are currently under review and when a consensus has been reached the Association of Short Term Lenders (astl) may issue a position paper which will become part of its Code of Conduct.  The astl’s membership rules oblige members to comply with its Code of Conduct.”

And so, the consensus across the entire industry, including brokers, lenders and associate bodies, suggests that upfront fees are both a fair charge and at times even necessary to progress a deal but only when they are completely transparent.

Yet, it has become apparent that there is still a vast area uncertainty surrounding upfront fees with the industry, with some lenders wary about levying this fee as not discourage potential clients.

Thus, flexible charging structures are key, with each loan tailored specifically to the individual merits of the deal, providing further emphasis for brokers to become familiar with the diverse range of products currently on offer in the market.

 

By Alexandra Jones

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