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THE PROBLEMS WITH BRIDGING LOANS PART III – REGULATED MORTGAGES

From purely a regulatory point of view, bridging loans fall into either of two categories, either they are regulated or unregulated loans, and therefore defined under the umbrella of either regulated mortgage contracts or unregulated mortgage contracts.

If they are unregulated, a lender that is itself regulated can provide an unregulated bridging loan in addition to providing regulated bridging loans, but a lender that is not regulated cannot lend or enter into a regulated bridging loan mortgage.

On 21 March 2016, second charge mortgages joined first charge mortgages as being Regulated Mortgage Contracts. This included certain first and second charge bridging loans.

Under Europe’s Mortgage Credit Directive (MCD), in Europe the differentiator between regulated and unregulated bridging loans was that no part of the secured property could be used for residential purposes, while in the UK it was 40%. In addition to this MCD had a new category of mortgages, those called Commercial Buy to Let Mortgages, often dubbed “Accidental Landlords”. This is where, for example, people became owners of property that they wanted to rent out for a period of time, before disposing of it, or living in it themselves. Until 2016, the FCA in England and Wales sort only to differentiate between mortgages (and bridging loans) meant to individuals, as consumers, and mortgages on properties which were for commercial means, and where the borrower was a corporate, or a firm. In this latter category fell “Buy-To-Let” mortgages.

So, according to Chapter 4 in PERG, mortgages (and therefore bridging loans) where a first charge or a second charge was over land which was, as a minimum going to be occupied at least 40% on a residential basis, and where the borrower was an individual, or a partnership, these are Regulated Mortgages.

In some cases that I have come across, lenders, or advisors, or lawyers have thought that if the purpose of the mortgage was for business purposes, this would cause the whole mortgage to be an Unregulated Mortgage. However, PERG 4.4.10 deals with this, stating that the purpose of the loan is “irrelevant”.

Some lenders, presumably those that are unregulated but would wish to provide a Regulated Mortgage loan, have tried to get around this by asking the borrower to sign a waiver, a Certificate that the Borrower is not a Consumer, but PERG 4.29 and 4.30 provides guidance on this too. If the borrower signs that they are not a consumer, but the lender realistically knows that they are, the mortgage is not excluded from being a Regulated Mortgage Contract.

In future posts I will post about mortgages taken out before March 2016, as well as examine some case law on the issues discussed above and in previous posts. I will also examine how failure to attend to the Rules by borrowers links to what is termed the General Prohibition, and how Article 19 deals with this.

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