unregulated been a lot of talk in the press about homeowners applying for mortgages with “[tags[adverse credit[/tags]“.  The popular press tends to concentrate on the problems this causes for for the applicant, but the issue of adverse credit applications creates problems for brokers and lenders too.

The headlines have been caused by the recent problems in the US non-conforming market.  The finance industry regards any application with adverse credit as “non-conforming” and in the the US lenders have been granting mortgages to people who subsequently were unable to meet their repayments.  With disastrous consequences for some of the major lenders.

With rising interest rates the same problem could easily arise in the UK market, and this is obviously causing concern to lenders and the industry regulators.  The Financial Services Authority (FSA) is watching the sub-prime market carefully.  Sub prime is yet another piece of jargon for adverse credit.

The result of all this is that the FSA are keeping a close eye on the activities of sub-prime lenders and brokers, but it could be argued that the only long term solution to debt problems is the education of borrowers.

How Common is Adverse Credit

There have been plenty of horror stories in the press about rising levels of debt and its consequences, but just how bad is the situation? In the first quarter of 2007 there were (according to the insolvency service) 30,075 insolvencies recorded in England and Wales, roughly a 50% increase on the same period last year.  By the end of April 2007 the total personal debt in the UK was £1,325 billion.

The most worrying statistic is probably the levels of secured debt.  Amazingly there is £1,112 billion secured against homes in the UK, this includes first charges (mortgages) and second charges (secured loans).

With the recent interest rate rises starting to bite there is inevitably going to be an increase in the number of missed payments and this would add to an already increasing number.  For example, recent figures show that around 75,000 payments are missed every month.

Lenders are well aware of the difficulties faces by adverse borrowers, and they are also aware that when someone with adverse credit applies for a mortgage there is (statistically) a good chance the borrower will experience problems in the future.  The FSA has made it clear that it expects lenders to treat borrowers who experience financial difficulties fairly.

To cope with the increasing numbers of missed payments lenders have special departments to look after arrears and missed payments.  The main function of these departments is to try and help the borrower bank on track by arranging payment plans.  However with so many missed payments each month, there will inevitably be some lenders who fall short of the standards expected by the FSA.  The most aggressive tactics are likely to be employed by the un-regulated sectors i.e. buy to let lenders and commercial lenders.

Whatever your circumstances the advice from all the debt counseling services is clear,  talk to your creditors and seek help as soon as you realise there is a problem.

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During a recent speech the outgoing chief executive of the Financial Services Authority (FSA) publicly stated that he would like to see secured loans come within the regulatory umbrella of the FSA’s control.

It was suggested that the current regulatory regime, with the office of fair trading (OFT) covering some consumer transactions, and not others was disjointed. Currently the FSA regulate all first charge loans on owner occupied properties with the OFT regulating second charge loans under £25,000. Secured Loans over £25,001 are currently not regulated by either authority.

One of the arguments for letting the FSA take over regulation of the secured loan market is that it will make it easier for lenders and brokers to deal with just one regulator. Although the counter argument is that the mortgage market and the secured loan market are very different beasts.

In the event that the secured loans market became regulated by the FSA the biggest casualty would probably be the smaller brokers. The costs associated with compliance can be crippling to all but the big players.

Of course these were just the comments of the outgoing chief executive of the FSA. In reality it is unlikely he would have made these comments if any change was imminent. The most likely outcome is that the government will be watching the effects of the implementation of the revised Consumer Credit Act 2004 (CCA), this changes many of the current regulations covering secured loans and could satisfy demands for more regulation.

Technorati Tags: secured loans, homeowner loans

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The UK secured loan market has grown rapidly over the last 10 years, according to figures from Datamonitor the market is now worth around £6 billion. Any market this size is bound to attract its share of suspect operators and the UK secured loan market is no different.  There is still very limited regulation covering second charge loans with most of the legal stuff designed to protect the lender’s interests and not the borrower’s.

Anyone who owns a television will definitely be aware of the promises that a secured loan will solve all their worldly problems. Few people will be aware that the vast majority of advertisers are brokers and not lenders, further they may not be aware that in order to become a finance broker you only need a Consumer Credit License from the Office of Fair Trading. Although the system is set to change in 2008, at the moment a Consumer Credit Licence costs less than £300 for 5 years which makes getting a license easy.

Most of the advertisements seen on television tend to focus debt consolidation, which is a shame as this undervalues the concept of a secured loan. It is also something of a myth that a secured loan is always cheaper than credit card debt. If a borrower has to “self-cert” their income, which is not unlikely if there are significant debts to be consolidated then the interest charged can easily exceed credit card rates.

Secured loans are NOT regulated by the Financial Services Authority (FSA). The FSA took over control of the mortgage industry in 2005 but secured loans, buy-to-let mortgages and commercial loans were excluded from their authority. If a secured loan exceeds £25,000 then it is not covered by the Consumer Credit Act and you are likely to see very high early repayment charges. There are a couple of self-regulating organisation such as the Association of Finance Brokers (AFB) but as membership of such bodies is voluntary it is difficult to imagine how effective they can be.

It is not all bad news about secured loans though, there are plenty of examples of how a secured loan can be a cost effective and efficient way of raising capital quickly. Given that the legal implications of taking out a secured loan are similar to your mortgage it makes sense to talk to your mortgage broker first. As all mortgage brokers are regulated and vetted by the FSA it is far less likely that you are going to encounter any dodgy practises or non-disclosed fees.

All financial advertisements offering secured loans are required (by law) the carry the FSA risk warning stating that your home is at risk if you fail to keep up payments on a secured loan. Take note of that warning and don’t just assign your home to someone you have no reason to trust other than the fact they have hired a celebrity to endorse their products on television!

[tags]secured loans, debt[/tags]

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