We look at the issues that arise when considering contributory negligence in the context of claims made by non-status lenders.
One might think that the reduced availability of credit from traditional sources over the last few years would have naturally led to a boom time for non-status lenders. For some, business has been good. However, others have suffered substantial losses and (like their high street counterparts) are now seeking to redress this by bringing recovery actions from the valuers and solicitors who acted for them.
So, what exactly is non-status lending and what contributory negligence issues do you need to look out for when dealing with a claim from a non-status lender?
What is non-status lending?
Non-status lending is not a new phenomenon. Traditionally, non-status lending catered for people who could not obtain mortgage finance from mainstream lenders as a result of impaired or low credit ratings. However, that is not always the case and nonstatus lending has developed into other areas where only limited enquiries, investigations and documentation are sought in support of the borrower’s application.
Unlike most high street lenders, therefore, non-status lenders do not commonly carry out credit checks, require proof of income, or investigate the borrower’s ability to service the loan. Instead, non-status lenders focus primarily (or exclusively) on the value of the property they take as security. Supporters of this approach to loan underwriting argue that the borrower’s income, status and credit history do not matter, provided that the loan to value “cushion” is sufficient to cover the lender’s capital, lost interest and costs of repossession and sale if the borrower later defaults.
However, this approach (coupled with the downfall in the property market) has left many non-status lenders exposed. Many non-status lenders are also reliant upon funding from large clearing banks and have had their ability to lend restricted over the last few years as the clearing banks tighten their own wholesale funding criteria.
Contributory negligence issues
Even in the last round of lenders’ litigation, reported cases involving nonstatus lenders were few and far between. As a result, trying to predict how the court will approach the issue of contributory negligence in a nonstatus lender’s claim is considerably more difficult than it is when dealing with a standard lender’s claim.
Expert lending witnesses engaged by non-status lenders will frequently argue that “ordinary principles of lending” do not apply in these cases. Instead, they say that their clients should be judged by the standard of a prudent non-status lender. They say, therefore, the absence of detailed lending criteria is irrelevant and the only thing that matters is whether the lender sought to put in place ample security.
However, many other lending experts disagree. They argue that the principles of responsible lending apply equally to non-status lenders and that this includes an obligation to make a proper assessment of the borrower’s ability to repay. In other words, it is negligent for a non-status lenders to have ignored the question of whether the borrower could actually meet his or her loan repayments and/or repay the capital sum loaned to them. Many experts are also highly critical of the steps taken by non-status lenders to check whether the security they were obtaining was adequate.
As with any other lender claim, each case is largely fact specific and, in the absence of definitive guidance, the court will have to determine whether the lender in question acted prudently in the circumstances of the loan in question. However, it is worth considering the following issues when dealing with a claim by a nonstatus lender:
- Did the lender comply with its own internal lending criteria? In many cases, non-status lenders do not operate to specific lending criteria other than having maximum loan to value (“LTV”) ratio. If so, it is also well worth investigating whether the loan made by the non-status lender complied with any more detailed lending criteria which were set down by its own wholesale funders;
- Was the LTV “cushion” reasonable, given the size of the loan, agreed repayment period and in light of the other information the lender had about the borrower?
- If the loan was sizeable, did the lender obtain more than one property valuation and, if so, did it limit its lending to the lower of the valuations? Did the lender ignore any relevant information about the borrower, such as poor credit history, ability to pay, or honesty? Given such checks were often not made, you may need to make your own investigations about the borrower;
- Loans made by non-status lenders were often short term, interest only loans with high rates of interest. If so, did the lender properly consider its exit strategy? In other words, were investigations made into how the loan sum and interest would be repaid (for example, through a sale or refinancing) and was this realistic?
- Did the lender obtain a valuation which reflected the exit strategy? For example, if the loan was due to be repaid within three months through a sale by the borrower, did the lender obtain a 90-day (as opposed to open market) valuation?
As with all lender claims, disclosure of the non-status lender’s own lending criteria/manuals, along with copies of any lending agreements setting out lending criteria imposed by the lender’s own funders (if relevant) and all of the information provided by the borrower, is necessary in order to maximise your chances of success.