Legal brief
We asked Daniel Fireman, head of banking and real estate finance at Howard Kennedy, what the legal ramifications of an increasingly heated market could be. Here, he advises on five ways this could affect his profession.
There is little doubt that, notwithstanding the seemingly new normal of economic uncertainty, the property sector of the specialist finance market continues to expand. New market entrants of various structures, sizes and lending specialisms, affording a broad range of loan terms, emerge almost every month.
Competition in itself should not throw up unique challenges for these specialist lenders, and clearly the emergence of new funding lines and innovative products keeps the focus on the sector - which is, on the whole, positive.
From a legal perspective, however, a number of potential implications of a burgeoning market spring to mind. Most notably in relation to unregulated lending, these are some of the implications:
- the spotlight on unregulated loan terms that might be considered unfair or unconscionable is likely to attract the regulators at some point, which may well justify the introduction of protective legislation. Such terms might include the charging of interest on a gross loan throughout the entire loan term, notwithstanding day one deduction of upfront interest, and the monthly imposition of hefty default interest rate hikes (whether or not disguised in loan documentation as ‘standard rate’)
- potential public outcry in the event of operator failure, following the proliferation of online peer-to-peer platforms, lending low-cost funds raised from the public by way of unregulated secured loans to commercial borrowers. The online platforms themselves are regulated and licensed by the FCA, and the operators have to go through a lengthy and expensive process to secure the appropriate licence. The rules regulating collective investment schemes are exempted, however, and the funds raised can be applied in full towards unregulated loans, which leave the online funders exposed to the impact of not only adverse market conditions, but also any poor underwriting practices adopted by the platform operators
- the potential for broker and specialised lender trade bodies to collaborate in relation to the standardisation and harmonisation of loan and security documents. Ideally, this would eventually lead to a recognised and approved format but subject to the usual variables, which would be available for use by both existing and new lenders to the market. This streamlining should enable swifter and more efficient transaction turnaround and avoid lawyers seeking to reinvent the wheel each time loan and security documents are negotiated or when a new lender emerges
- in a more heated market, which is bound to include less experienced lenders with less sophisticated underwriting processes, there must be an increased risk of fraud, so lawyers, lenders and brokers may need to increase the focus on employing effective measures to identify issues and inconsistencies that might suggest all is not as it should be, and weed out potentially fraudulent propositions
- as the market gains further exposure, it should attract the attention of increasing numbers of potential borrowers who existing and new lenders alike will need to ensure have the benefit of competent legal representation. Inevitably, the lawyers nominated to represent some borrower applicants will be less equipped to do so effectively than others, and brokers - and, in particular, broker/intermediary trade bodies - might wish to work to identify and maintain a register of potential law firms and lawyer individuals for borrower referral purposes.
