Chancellor Rishi Sunak has earned his wages in his first few weeks in the job. Bold decisions and a promise to “do whatever it takes” seem to be exactly what the economy needs. He has been keen to emphasis that his words turn into actions. So far as the promises he made on behalf of the Banks are concerned-
- How will those promises be applied in the short term?
- Will these promises set the tone for the behavior that lenders will adopt to loan defaults in the weeks and months that will follow?
Leading banks and lenders will be pondering what role they should take. Following the 2008 financial crisis these institutions were painted by the media as the ‘villains’ who had caused that crisis. Since then, many such lenders have been on ‘charm offensives’ with carefully conceived marketing campaigns orchestrated to convince the public that they are ‘on our side’. Will the institutional lenders therefore see, in the present crisis, a chance for redemption? The repercussions of the crisis will be both immediate and long term. Lenders will be considering how to deal with immediate ‘cash flow’ related breaches of loan facilities and, separately, with the longer term ‘big picture’ of an increase in overall loan defaults that will inevitably arise across all forms of lending.
The best place to start is the immediate issues and the Chancellor’s pledge.
The Chancellor made a commitment on behalf of lenders to make available “3 month payment holidays” on mortgages. It’s worth exploring how that pledge will work in practice.
UK Finance (the body which represents and supports major institutional lenders) was commendably quick to take a ‘joined up approach’ with the Chancellor. Its CEO swiftly gave a press release stating in clear terms that:-
“mortgage lenders will support customers who are experiencing issues with their finances as a result of Covid-19 and the options include a payment holiday of up to three months. Monthly mortgage payments tend to be the largest outgoing for the vast majority of households and lenders are keen to reassure homeowners that the industry is working hard to put measures in place to support them during these uncertain times. Customers who are concerned about their current financial situation should get in touch with their lender at the earliest possible opportunity to discuss if this is a suitable option for them.”
The Chancellor’s plan appears a focused response to a specific problem. Supply chains and business are interrupted. The immediate concern for the average business is of cash flow. For the average individual it is a concern of ‘making ends meet’ in the immediate short term. Paying the mortgage is the biggest regular monthly commitment for most households.
The clear message emerging as to how the 3 month payment holiday should work are:-
- the onus is on a borrower to contact their lender and agree a holiday although guidance also suggests that lenders should also be proactive in considering offering payment holidays even if one has not been expressly requested.
- There are to be no adverse credit history issues
- Interest may still to be charged and applied to accounts to be paid at later dates
Each lender will have its own practices and procedures when it comes to applying payment holidays. Websites such as ‘Money Saving Expert’ have helpful webpages which summarise how some of the key institutional lenders are currently applying the policy.
The regulatory framework that applies when a lender considers gives forbearance to a consumer (such as the well-known ‘TCF’ (treating customers fairly) principles) remains unchanged. Indeed, the FCA has lent heavily on that framework when explaining why it expects lenders to ‘tow the line’ and observe the proposals by its strongly worded guidance note of 20 March 2020 (available in full on the FCA website).
The proposal operates as a brake when a lender comes to consider how to address the inability to make monthly repayments on the average residential loan. The aim is to halt possession action based in circumstances where it might otherwise bring a mortgage possession claim of the type regularly seen in ‘block lists’ of District Judges up and down the country.
What will happen in relation to mortgage possession claims that are ongoing or where a claim is contemplated following an existing breach? Courts ‘remain open for business’ and there has been no change to the fundamental principles of law to be applied. However, the FCA’s powerful statement on 20 March will have caught the attention of lenders. By this the FCA have discouraged lenders seeking to obtain and enforce possession orders at the present time as being “very likely to contravene Principle 6 and MCOB 2.5A.1R – absent exceptional circumstances”.
All of these points above involve a tight focus both in time and in the type of lending and borrower involved. The case of an individual borrower temporarily unable to pay a residential mortgage with an institutional lender will not be the only loan default situation to be expected over the coming weeks and months.
Defaults are expected to escalate in all areas of lending. Lenders can expect a dramatic increase in borrower requests that forbearance should be given in the coming months. These requests will be made across all spectrums of lending from simple residential mortgages to large and sophisticated commercial loans.
There is nothing profound in saying that lenders will want to consider any requests for forbearance very carefully. The legal framework that guides their choices has not changed and the wide range of enforcement options available to a lender remain open. In considering how to exercise their options lenders will want to want to keep an eye on guidance emerging from the FCA and the like. Lenders must be careful. If a borrower’s default/inability to repay a loan is linked to the Covid outbreak then is it a temporary issue where giving forbearance/ offering to restructure a loan will improve the prospects of a recovery? With the UK already bracing itself for disruption with Brexit pending, lenders have already been expecting a likely increase in loan defaults. They will want constructive discussions with their borrowers to fully understand the reasons for loan defaults and how exit routes can be achieved. Each case will be different. Many loans will be suitable for restructuring or forbearance. In some cases however enforcement will be the only appropriate step.
One of the more memorable moments of last week were the words of Andrew Marr on his Sunday morning political show- “this is the moment when selfishness starts to become seriously unfashionable”. My take on that is that a lender concerned with conduct risk will be keen to ensure that they react to loan defaults fairly. Lenders will not want to be seen to be acting vindictively or opportunistically. Equally, borrowers who have entered into commercial loan arrangements which constituted a commercial risk to make profit should not expect forbearance or ‘debt forgiveness’ as a matter of course.
Banks and lenders may want to take the Chancellor’s ‘3 month pledge’ as a yard stick. Focus on a specific problem. Formulate a measured and clear response.
In recent years loan enforcement has been directed down a path where a lender is encouraged to engage in a dialogue with its borrower to address how a loan is to be repaid. Much of the MCOB framework and the debt pre-action protocol encourage such a dialogue. It reasonable to assume that any new ‘bolt-ons’ to this area that the present crisis inspires will continue to follow that theme.
A lender will want to know precisely why a loan commitment cannot be met. As Bob Hoskins said “it’s good to talk”. A prudent lender will welcome a dialogue with its borrower before a problem arises. Where there are trade or cash flow issues then there is nothing inappropriate in a lender asking for proof. A borrower can produce copy correspondence; bank statements, contracts etc. All should be relevant and easy to produce.
Does a borrower/guarantor have the ability to make proposals based upon other assets or streams of income? If so, what steps will be taken and what forbearance should be allowed to facilitate those steps? What financial disclosure will a borrower volunteer? A ‘cards on the table approach’ on both sides may be invited.
A lender may want the ‘thought process’ to be documented. Crucially, if it is to allow forbearance then it should consider following the Chancellor’s lead. It will wish to impose clear and measured conditions. These are always best recorded in writing.
The starting point for a lender may be to reserve its rights in relation to any default. Most lenders will be familiar with a clear ‘reservation of rights’ letter. Once a dialogue is complete the lender has a variety of routes to give forbearance. It may want to offer a formal written loan variation. In a simple case a letter reserving rights but offering terms of forbearance may be appropriate. Either way, documenting the terms of forbearance is strongly recommended. A prudent lender will never discount the possibility that enforcement action is needed. A sensible borrower cannot assume that forbearance is a right or will be granted automatically.
