Although secured loan enquiries are climbing, regulatory uncertainty and the funding drought are testing the resilience of the secured loans sector.

The secured loans market is facing an uphill struggle at the moment, with many firms finding uncertainty and the challenge of surviving the recession insurmountable.

The secured loan landscape has changed dramatically in the past three years, with business volumes falling by more than 90% from their peak.

Although the secured loan market is starting to see light on the horizon there are question marks over its future. Changes in the way firms are regulated and how they sell payment protection insurance are threatening its survival, along with funding constraints.

Two years ago the secured loans market was a different place. West Bromwich had just launched its secured loans subsidiary White Label Loans while secured loan lenders such as Southern Pacific Personal Loans and First Plus were bringing the sector into the mainstream domain.

But when the credit crunch hit the secured loans sector suffered as lenders started to withdraw and secured loan packagers found it hard to place business.

The past 12 months have brought little joy, with the Financial Services Authority introducing new measures for secured loan firms selling PPI which require them to reopen some 185,000 previously rejected complaints and reassess them.

In the past the secured loans market has relied heavily on income from PPI sales and if the FSA decides to introduce stricter selling guidelines, it could kill off some businesses.

The regulator is also launching targeted assessment of sales practices for PPI on secured loans and credit cards. If the potential for mis-selling is identified proactive reviews by firms may be extended to these areas too. The Association of Finance Brokers is concerned these measures could lead to the application of today’s standards to the work of yesterday.

Lesley Titcomb, director of small firms at the FSA, warned at the recent Mortgage Business Expo that its review of PPI could push some secured loan firms over the edge and tempt them into phoenixing.

“Our recent consultation paper on PPI raised the prospect of companies having to reassess PPI complaints they have previously rejected, and some believe this means more secured loan organisations will try to become phoenix firms,” she told the audience.

On top of this, the secured loan sector is facing the prospect of FSA regulation. This has not gone down well with some in the industry who are worried the regulator does not fully grasp how the secured loan business operates. At the moment, all secured loan firms fall under the Consumer Credit Act and are regulated by the Office of Fair Trading.

“I hope the FSA doesn’t get hold of secured loans but it is almost inevitable that it will,” says Simon Stern, director of secured loan lender Prestige Finance.

Stern fears the FSA could take a one-size-fits-all approach to the secured loans sector.

“The FSA needs to be sure it understands the secured loan market,” he adds. “The CCA has worked well and there are some aspects of FSA regulation, such as its capital adequacy requirements, that would not work in the secured loans sector.”

The Finance & Leasing Association, which represents secured loan lenders, is also dubious about the plans and says there is no evidence that consumers’ rights are not already adequately protected under the CCA so shifting the regulatory control of second charge mortgages from the OFT to the FSA would be like using a sledgehammer to crack a nut.

In its recent Mortgage Market Review the FSA recognises the need for secured loans.

“Second charge secured loan lending potentially provides a cost-effective borrowing option as an alternative to either remortgaging or taking out a further advance,” the review states. “This is particularly the case where there might be significant early repayment charges on the first mortgage.”

But the regulator has raised concerns that the second charge secured loan market could be the first port of call for consumers turned away from the first charge mortgage market.

“Not only would this potentially involve higher costs and be less affordable for the consumer, perversely it would also mean that they would not have the benefit of the regulatory enhancements that our proposals aim to deliver,” the review says.

Gary Bailey, director of lender Blemain Finance, says he is in favour of anything that improves the secured loan sector but care must be taken to ensure that a transition between regimes does not prove detrimental to the market by creating confusion for lenders and borrowers.

“FSA regulation is principles-based whereas CCA regulations consist of precise requirements that lenders must meet in terms of their practices and products,” he says. “Changes to the framework must not stifle the sector with over-regulation in an attempt to make these two approaches work in unison.”

As brokers and lenders await the outcome of the FSA’s review they are having to contend with more immediate issues such as the prevailing lack of funding.

“We still have our three lines of funding but whether we will have these next year, who knows?” says Stern. “We are optimistic but we can’t make serious plans because we just don’t know. But our lending in Q4 2009 will be higher than in Q1.”

Troubles in the first charge mortgage market have helped boost the sector. The lack of specialist products such as self-cert has led an increasing number of brokers to look for opportunities in the secured loans market.

Specialist secured loans firm Your Broker Network says it is seeing more mortgage brokers approach it for access to self-cert secured loan products due to the dearth of self-cert deals in the mainstream market. But the maximum LTV available is only 55% so applicants needing more than this need reference letters from accountants.

Master secured loan broker V Loans also says its enquiry levels are 50% higher than they were six months ago, and that some 65% of these are from brokers looking to raise capital but finding they cannot access remortgage deals due to lack of facilities, particularly in the areas of sub-prime and self-cert.

“Savvy brokers recognise that secured loan providers such as us can still provide them with facilities to place their sub-prime and self-cert cases,” says Dave Pinnington, business development director at V Loans. “As secured loan lenders specialising in these areas have either cut back or pulled out we have seen our secured loan enquiry levels increase substantially. For example, since Beacon Homeloans’ announcement that it was pulling out our daily enquiry rate has doubled.”

Blemain Finance says a significant proportion of its secured loan business is with borrowers with only slightly adverse credit records but for whom the lender is the only option in the current market.

“In the longer term we will see a gradual return to a more active secured loans market,” says Bailey.

“But any growth in second charge secured loan lending will depend on capital markets reopening and supporting recovery in the housing market.

Many consumers who were already on high LTV mortgages before the recession will need time to build up equity in their property before they consider secured loans.

“Banks are likely to focus on first charge lending until their balance sheets are looking healthier and only then will they look at funding the securd loan market,” he adds.

Bailey points out that the other side of the coin is that many consumers who would like to raise capital using their property as security would be better off taking out second charge secured loans than remortgaging.

“We may see a strong demand for secured loans from a particular type of home owner, specifically those who have suitable equity in their property and want to release capital but don’t want to remortgage and lose the benefits of their current deals,” he says. “A secured loan could be the best option in these cases.”

Although there are circumstances in which a secured loan may be the best option, with some brokers there may still be an image gap to bridge.

“The secured loans industry has changed and brokers are having to work harder to place business,” says Darren Grace, operations director at packager WLM Money. “Regulation has also helped clean up an industry that used to be frowned on by mortgage brokers, IFAs and customers.”

Although secured loan lending can now only be done to a maximum LTV of 80% through a handful of lenders, there are still opportunities for mortgage brokers.

“There are some excellent secured loan products for customers tied into their mortgages, those who need to consolidate and those starting to see credit problems,” says Grace.

“These deals feature only one month’s repayment penalties as long as a month’s notice is given. This kind of flexible product has a place in today’s market. Gone are the days of volume for lenders - they must now concentrate on quality.”

Grace believes the secured loan industry will continue to face tough times in the first half of next year but says this could change quickly if new lenders enter the market.

“A lot depends on house prices and if they continue to rise I’m sure confidence will return,” he adds.

As with the first charge mortgage market there are rumours that new lenders are looking to launch into second charge mortgages.

John Prust, former director and founder of Southern Pacific Mortgage Limited, and Robert Owen, founder of London Mortgage Company and White Label Loans, are two of the names in the frame to launch into the secured loan market. Both are keeping quiet about their plans until they have secured funds to launch.

But there are fears that FSA intervention could have a detrimental effect on lenders entering the secured loan market. If the regulator decides to restrict lending to organisations with substantial funding it could be bad news for aspiring entrants.

Some in the industry will remember the troubles in the economy during the 1990s. Back then, the secured loans sector was first to recover and some predict the same will happen again. Indeed, during this recession demand for secured loans has remained high but if this is not matched with funding the market’s future will continue to hang in the balance.

So the secured loans sector has been through tough times before and managed to cling to life.

There’s little doubt it is now facing one of its most challenging and uncertain periods but given an adequate flow of funding and with the right professionals fighting its corner there’s no reason why the secured loans market can’t return to buoyancy once more. But there are a few obstacles to be surmounted before its survival can be assured.

Posted 23/11/2009 19:53:12