What is it?
The banks/lenders use their own lawyer to deal with the mortgage and the buyer/ borrower uses his separate lawyer to deal with the purchase. That used to be the way things were done. There were not any problems of mortgage fraud or negative equity. We are not saying that separate representation will remove the risk of negative equity, but it is something which will make mortgage fraud more difficult.
When buying and selling property, there are common aims and yet different interests. The seller wants you to buy his property and so do you, but he might not tell you any of its problems. It is for you, as the buyer, to find these out. Therefore the seller uses his lawyer and the buyer uses a different one. They are separately represented.
It is assumed that there is no difference in interest between a lender and a borrower. They have the common interest in that they want houses that should be easy and cheap to buy and sell.
But there is, in fact, a potential conflict at the very heart of the process.
It is the interest of the borrower that you can afford to buy the property and be secure that you can stay there and be able to sell it when the time arrives, if that is what you want to do. It is the interest of the lender that it makes money.
In the good old days, before ‘Big Bang’ in 1987, High Streets had things called Building Societies and when you wanted to buy a house you contacted a Building Society to borrow the money, or as you should see it, to get into debt. They checked that you had sufficient income and warned you of the pitfalls and, subject to your means, were willing to lend you monies, sometimes up to three times what your annual income might be, but usually two and half times that income. They expected you to have some monies to pay some of the price.
What are the risks with mortgage arrangements?
The risk that the lender runs is that the property is worth less than the debt, when it comes to be sold. This is called negative equity.
The Big Bang liberalised the banks to be able to take risks with people’s money. The vast majority of borrowers just want to own their home. There is a sizeable minority who simply want to own an asset, from which they can get an income or a profit. The lender not only wants to be able to get its money back, but the lender actually wants the value of the asset to grow, and not only so that it can be sure that it’s going to get its money back. It also wants the asset to grow so that people will be encouraged to get into debt. Its business is making money out of debt, whichever way it can. When the asset has grown in value and you are getting on in life, it now wants to lend you money under an equity release scheme, because you cannot afford to pay back mortgage repayments.
The problems that have been caused for property owners over the years are ones that have been created by the lenders interest in selling products (debt) rather than helping to build society.
The lenders have learned the lessons of repossessions of the 1990’s and have given time to house-owners who fall behind with their payments, which has meant the number of repossessions in this recession is far less than it was in the early 1990s. Then the lenders relied on mortgage protection policies sold to borrowers, as a way of recovering their monies lost on the forced sales of properties. Borrowers thought that such policies would safeguard them, even if they had lost their home, they would be safeguarded against the short fall from negative equity. Yet in many instances the insurance companies have then pursued the borrowers for the monies that they had to pay to the lender.
Twenty years on. For the lenders there is a great risk that, if house prices fall substantially, then their debts are not going to be repaid. Not simply those who lent in some ridiculous ways, for example to borrowers who could not afford to repay the debt unless the property price escalated significantly. In 2008, the collapse of Lehman Brothers led to fears that the collapse of the banks was, for a few weeks, an imminent risk. Governments took action- bailouts- so the banks at least had enough cash to pay monies to the people who had deposited their savings with them. So for the last four years the banks have been offered easy and cheap credit through the delightfully named quantative easing.
What are the risks for the borrower?
The possibility that a home which is secure and affordable could be taken away by illness or redundancy is a risk that all borrowers might face. That your property could go down in value so that the monies you have paid into it as a deposit will be lost, is not often considered likely at the time you buy. However, that risk is much greater now and particularly so in the case of new housing estates where there is evidence of prices falling.
There is no question when it comes to equity release; the lenders insist that the property owning borrower sees a lawyer to get independent advice. It is a highly lucrative business because the interest rates they receive are high and their administration costs are low in comparison to normal residential mortgages. Here there may be no “lenders charges” for separate representation and the customer can choose any lawyer they want, because the lenders know that they are dealing with vulnerable, usually elderly people and they want to avoid any challenges from a relative who sees that this was a very expensive choice of funding. The lenders don’t require panel membership. They want the lawyer to take the risk that the customer will complain about the cost to them of the loan.
So that is the argument in principle. There are conflicting as well as converging interests for lender and borrower.
What do the lenders say?
The lenders state that they accept the borrower has a right to separate representation. But they don’t believe separate representation means the borrower has a right to choose who deals with the mortgage. The lenders idea of separate representation is in fact a misrepresentation; they choose who deals with the mortgage and the borrower pays.
The Council of Mortgage Lenders put it like this
“ In recent years, lenders have been moving towards more active management of their conveyancer panels, with the effect that there will now be a higher incidence of cases where a particular conveyancer may not be on a lender’s panel. There are numerous reasons for this including:
- small or new firms, or firms with very low volumes of conveyancing transactions;
- commercial considerations relating to the lender’s preferences in terms of its panel criteria;
- the conveyancing firm’s capacity to deliver particular services expected by the lender; or quality concerns.
The CML points out that a conveyancer not on a lender’s panel should not necessarily cause concern if a borrower wants that conveyancer to act for them. But borrowers should take steps to satisfy themselves with their choice of conveyancer.”
What have the Lenders done?
Lloyds Bank, in 2010, and Santander, at the start of the Olympics, culled hundreds of solicitors firms from its panels, almost all of them small High Street practices with less than 4 partners, on the one and only ground that these firms did not, in the previous 12 months, complete enough volume of the particular bank’s mortgage transactions to meet new criteria which each bank introduced as to the levels of transactions to be on its panel. These banks do not allow separate representation for their customers, but insist that the customer must use a solicitor of its choice even where the customer wants to use a panel firm for the mortgage work. These banks refuse to disclose the number of transactions that qualify to be on their panel.
That action was accepted by the Law Society, in the case of Lloyds Bank, to be unchallengeable and not anti – competitive, even though the Lloyds group is the largest in the residential lending sector and at that time had been heavily funded by the UK Government to keep it from insolvency.
HSBC offered to its new borrowers a panel of 43 firms in February 2012 stating that those firms would all act on a ‘no sale no fee’ basis and that HSBC would guarantee to keep their panel firms’ fees low. It stated that if you wanted to use your own lawyer then these firms would act for the bank and you would pay £160 plus VAT to have separate representation. HSBC did not say that separate representation did not work or that it was anti- competitive or that it would add delay. They simply wanted a modest fee.
The Law Society negotiated a deal with HSBC for what it calls a 2 tier system. The first tier is the HSBC panel firms. The second tier is the Law Society CQS firms. CQS is Conveyancing Quality Scheme. The Law Society did not seek the approval of its members to negotiate in this way or to campaign against separate representation.
The Law Society has already mobilised its resources to say that separate representation is:-
“will not work.”
“will add cost and delay to the conveyancing process”
The Council for Mortgage Lenders have in July introduced rules for separate representation, which they require the law firms who want to act for the buyer to comply with.
The Law Society has recognised that the actions of the lenders, in not allowing small firms, the High Street firms in small towns, to act for both the lender and the borrower, as they have traditionally done, has led to problems for hundreds of firms already and will lead to problems for more, but it maintains that solicitors must pay it to be accredited as quality conveyancers and has already abandoned thousands of firms who have not joined its untested scheme and it argues that this is the only way in which solicitors can continue to act for both buyers and lenders in future.
The Law Society sees separate representation as an impediment to a smooth property transaction which the public will not support or accept.
With the advent of the banks selling legal services and offering free legal service deals on conveyancing to their ‘customers’, there is a risk that the borrowers are going to lose the chance for consulting an independent solicitor.
How farfetched is that idea? Surely that is just scaremongering?
Birmingham Midshires customers are already being told that if they propose to use a solicitor of their choice, the product on offer to them, will be withdrawn!
It was one thing to inform a potential buyer that they may or will not be out of pocket if they use a solicitors services. It is a totally different situation to tell them that if they use us they cannot get a mortgage.
So, how to persuade the general public that separate representation is in their interests or worth fighting for. On the face of it, it means that they are going to spend more money on their purchase of their house. It need not be so.
Why do the lenders take this approach?
The arguments they have given are that the Financial Services Authority requires them to take a more active approach in the management of their panels. Frankly, that is insulting to anyone’s intelligence. The banks have had no trouble with the FSA in engineering the banking crisis in which the public came to their rescue.
Once the principle is accepted that the banks can reduce the panel size based on their arbitrary choice of volume, the banks can reduce their panels progressively.
The lenders want to make money, however they can. Santander introduced an annual fee to be on their panel. If reports of over 4000 firms having paid at £100 are accurate, that garnered £400,000 instantly. No guarantees exist that the fee wil not increase.
The lenders have targeted initially small firms as well as firms with very low volumes of conveyancing.
Our campaign is about choice and the key to growth of local business is small businesses not financial institutions. If a small town solicitor’s firm cannot undertake mortgage work and cannot act for the borrower/buyer because of the control of the lender, then the outcome is that the lender has no competition for its legal services customers and the town has no independent solicitor.
If the problem is mortgage fraud then the best solution is true separate representation.
True separate representation means each party uses its own lawyer, the seller has one, the lender has one and the borrower does the same. The borrower doesn’t get to choose who the lawyer acting for him or her will be under the current system.
If the lender controls the borrowers’ choice, which is what the lenders are doing, that erodes competition yet the Government watchdog, the OFT, doesn’t see it as an issue.
What started in 2010 and has gathered pace this year is the removal of the small solicitor firm from the conveyancing process. This is an attack on the High Street.
It needs government legislation to require separate representation. Politicians will be wary of defending a vested interest, small solicitors firms, but the wider picture is once a bank becomes a legal service provider, as in the case of the Lloyds Banking Group, that means the larger firms are in competition with it.
There will come a time when there will be a clamour for separate representation. The Law Society Chief Executive’s latest statement is:
“ Make no mistake, if the current panel management process goes on with ever –shrinking panel sizes, the banks will take to themselves yet more market power, erect significant barriers to entry, create markets that rather than being open and transparent are closed and opaque. This will not help the public, access to justice or reforms (if that be the right word) of the legal services markets: the driving philosophy behind the Legal Services Act”
So much for fine words. He sees the problem, but in the same breath, states;
“We are confident that the time to consider the separate representation rule is not upon us and there are, instead, alternative ideas and ways of improving the conveyancing process.”
The problems don’t lie with the process. It is the culture of the lenders that needs to change and without separate representation, sooner rather than later, the risk is that there will not be a solicitors profession in the High Street of a town near you.