Fees and charging structure in the industry

By Daniel Fireman, Partner at Howard Kennedy

As a property finance lawyer operating mainly within the unregulated alternative finance sector, I see a broad range of different fees and charges imposed by lenders.

In my experience borrowers generally accept that loan terms from providers of alternative finance require payment by the borrower of some or all of the following fees:

1. An arrangement fee of between one and two per cent of the gross loan, which will often be stated to be shared with or paid to an introducing broker. This is usually payable by way of deduction from the initial gross acquisition or refinance advance.
2. A commitment fee of up to £5,000 dependent on the nature of the loan. This is more prevalent with complex development and mezzanine finance deals which require substantive due diligence before a formal offer is issued. These fees are usually non-refundable and payable on application and are offset against the arrangement fee on completion of the loan.
3. An administration fee rarely exceeding £1,000. This is usually payable by way of deduction from the initial gross acquisition or refinance advance.
4. Lenders' valuation and legal fees. These are generally known to borrowers from application and are payable irrespective of whether or not a loan completes.
5. Redemption and release fees.

These fees may require negotiation at the outset but the principle of payment is generally not controversial.

Points of controversy can include the following:

1. Fee calculation: Arrangement and other fees being calculated by reference to the gross value of the facilities offered, including the value of interest in cases in which interest is either retained from the gross loan or accrues throughout the term of the loan.  
2. Default interest: Seemingly unconscionable uplifts are sometimes sought notwithstanding that such uplifts might be deemed an unlawful and therefore irrecoverable penalty as opposed to a genuine reflection of the lender's losses. Assuming such uplifts are reasonable default interest will usually be applied at the lender's discretion whilst a default subsists or up to the end of the calendar month in which the default subsists. In some cases however, lenders seek to impose default interest until the end of the loan term following remediation of a breach, and in others, lenders seek to impose default rate interest retrospectively from the commencement of the loan term.
3. Minimum loan periods: Whilst specific early repayment charges are rarely a feature of short term lending, minimum loan periods within the permitted loan term are often specified obliging the borrower to pay interest until the expiry of the period imposed irrespective of the date of prepayment.    
4. Automatic Extension Fees: Some lenders impose automatic loan term extension fees in the event that borrowers fail to repay on time. It is not untypical for 5% of the gross loan outstanding to be imposed and to be retained by the lender in full irrespective of how soon after the repayment date the entire loan is repaid.

Lenders generally insist on independent certification that borrowers and other security providers have been advised of the terms of the loan and consequences of default. At the same time lenders will generally discourage or rebuff any attempts to negotiate, meaning most borrowers have little choice but to accept the lender's terms. From the intermediary's perspective, when assessing the loan terms for a particular client, clients ought to be made aware at the very earliest opportunity of the potential costs of default.

In the alternative finance space, responsible flexibility and expedition on a lender's part can and often do make the difference between a deal happening or not. Consequently, given the implications borrower default can have for a lender it is patently arguable that the risks inherent in such lending more than justify the imposition of harsher penalties than those imposed in the context of conventional secured lending. Both headline interest rates and default rates and charges are generally reflective of and recognise the risks and challenges for alternative funders of borrower and property propositions which by comparison with conventional lending generally afford less transparency and demand a much constrained time frame within which lenders often have to perform very substantive due diligence.