Bank Lending – Some Basic Principals

By Stanley Epstein - Principal Associate

The financial world is in a pretty messed up shape at the moment. So in examining the Financial Services Authority’s proposals regarding the reform of the mortgage market in the UK I get the basic impression that I am in Alice in Wonderland, at the Mad Hatter’s Tea Party to be exact.

What on earth has happened to basic lending principles? The FSA speaks of a changed approach to a more “intrusive and interventionist style of regulation”. As a part of these proposals they set out what they refer to as “key features”, six in all.
But of the six, three should, as a matter of course, be part and parcel of a bankers’ normal business practice. A regulator should not have to tell a bank what the basic principles of lending money are. Just consider the three following “key features”;

• “Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay” – there are two conditions wrapped up in one; affordability and the lender’s responsibility regarding the borrower’s repayment ability. The first is a dead standard condition for the granting of any consumer loan. The second issue goes without saying.
• “Banning ‘self-cert’ mortgages through required verification of borrowers’ income” –this is like leaving the fox in charge of the henhouse. Third party certification of a borrower’s income is also a standard consumer credit tool.
• “Calling for the FSA’s scope to cover buy-to-let and all lending secured on a home” – lending for a home to live in, is one thing. When a borrower purchases a property with a view to letting it and generating income this is something else. Here he or she is running a business and sound lending practice should also call for additional information like details of the letting market’s potential, letting conditions, contractual arrangements with renters, refurbishment costs, insurance and other business expenses and the like. This is a commercial loan not a consumer one. It is a logical extension of the first “consumer” aspect that the regulator should be looking after both facets of the business, not just one.

There should be absolutely no need to tell a banker, never mind make it a regulation, as to what the basic principles of lending money are. Unless of course the lenders aren’t really bankers! This of course begs the question as to why these people are even allowed to be in the business of lending money in the first place? These “banks” have obviously thrown all caution and prudential behaviour to the wind in their pursuit of market share and profits.

A few days ago I railed in Blog on the Finextra website against a new range of obscene staff bonuses to be paid by Goldman Sachs (“Is this just a Bad Dream?” http://www.finextra.com/community/fullblog.aspx?id=3438 ). I wondered there whether I had awoken in “Alice in Wonderland”. Now I know I have, and I am at the Mad Hatters’ Tea Party.

Good luck to the Financial Services Authority in what they are trying to achieve.