Bridging lenders urged to gain a 'clear picture' as to
Jack Medicott

Bridging lenders urged to gain a 'clear picture' as to how borrowers have obtained deposit funds

In an exclusive interview with Bridging & Commercial, Jack Medlicott, associate solicitor at MSB (pictured above), has urged lenders to ensure they receive a "clear picture" from the borrower as to how they have obtained their deposit funds.

The comment was made following a question from B&C with regard to what key advice, from a legal perspective, MSB was giving bridging lenders during these unprecedented times.

“My advice would be in relation to the source of a borrower’s funds — a lender should ensure that when a loan is at underwriting stage, it is receiving a clear picture from the borrower as to how they have obtained their deposit funds,” he said.

He claimed that MSB had seen cases where borrowers have tried to use the funds from government-backed Bounce Back Loans as capital towards a purchase or development

B&C caught up with Jack to find out how MSB is currently supporting the bridging market during the Covid-19 outbreak, and his views on the recent Land Registry changes and the challenges and opportunities they present. Read the full interview, below.

By how much have the recent changes made by the Land Registry helped move deals forward since lockdown?

The recent changes implemented by the Land Registry have ensured both borrowers and lenders have been able to conclude transactions without the logistical headache created by the lockdown — not only in the UK, but around the world. Borrowers are able to validly execute deeds and return them via email to their solicitor without the original being held on completion. People working in the finance industry know how crucial it is to arrange for the signing and return of security documents as swiftly as possible to progress deals through to completion, The Land Registry has facilitated a way for the industry to [do this].

When challenges and opportunities do these changes present?

As execution using the Mercury signing method needs to be by agreement of all parties, it is important that individuals ensure their lender, broker and solicitor are aware of their intention to use the method as soon as possible to avoid any delay later in the transaction. Since the procedures have been implemented, we have been able to complete transactions where relevant signatories have been located in Europe and the Middle East, the documents have been executed and witnessed in accordance with the new rules and then returned within minutes. Previously, the hard copy documents would have needed to be sent via airmail — this would have majorly impacted transactions due to the delays currently being experienced.  

While currently temporary, do you think it would be a good idea for Mercury rules, from a legal perspective, to continue when lockdown measures are lifted?

Demand for advances in the way the legal profession works in areas such as property and finance has grown rapidly over the last few years and it is really refreshing to see these new rules implemented so quickly. While this may not be the move to electronic signatures that people would [like] to see, it goes some way to show that technological advances are being considered. From a legal perspective, as long as the borrower has received suitable legal advice and fully understands the nature and implications of the documents that are being entered into, then the signature of the deed should be a formality that can be simplified. Colleagues in other departments in our firm have seen their clients’ cases progress with courts having remote hearings and video technology being utilised for arbitrations; there is [no] reason why we can’t have further advances in technology in property and banking. 

Does it make any transaction less safe when using Mercury rules? Are there any pitfalls, or things to look out for?

When we are instructed by one of the lenders we work alongside, part of our role is to ensure that, following completion, we are able to perfect the lender’s charge at the Land Registry so that the lender has the required security it requires over the borrower’s assets. It still remains the solicitor’s role to make sure that the lender’s security documentation has been correctly executed and procedures have been followed so that the documentation will be accepted by the Land Registry. It is important to remember that limited companies entering into borrowing will still need to register their charge within 21 days of completion at Companies House, and solicitors will need to receive the original signature, or a certified copy of the charge, shortly after completion to enable them to file the documents at Companies House. 

What key advice, from a legal perspective, are you giving bridging lenders during this time?

My advice would be in relation to the source of a borrower’s funds — a lender should ensure that when a loan is at underwriting stage, it is receiving a clear picture from the borrower as to how they have obtained their deposit funds. With the large number of applications being submitted for Bounce Back Loans, we have seen cases of borrowers trying to use the funds from these unsecured loans as capital towards a purchase or development.  

How many cases has MSB seen with regard to borrowers attempting to use Bounce Back Loans for deposits on property purchases?

I have been made aware of a number of scenarios from lenders who have received applications for terms on loans where it has transpired that the source of the borrower’s deposit funds and stamp duty had been obtained via a Covid-19 Bounce Back Loan. 

What implications would there be if a bridging loan completed in this scenario? 

The concern for the lender would be the lender’s ability to service the payments in the future if the borrower was required to commence loan repayments on the Bounce Back Loan during the term of the proposed loan on the property. At the underwriting stage and the assessment of the affordability of the loan, the lender would want to understand the borrower’s sources of income and the true extent of their liabilities. It would be prudent for any solicitor acting on behalf of a lender or borrower to obtain confirmation from the borrower that they have not obtained any further loans since the initial loan application was made. The Bounce Back Loans are being paid out extremely quickly at the moment, which may give borrowers the opportunity to obtain funds following the initial underwriting stage, but prior to completion of the acquisition. 

What other sources of borrower funds should bridging lenders be looking out for? 

It is important on any purchase transaction that the lender understands at an early stage how the borrower has obtained any balance funds that need to [be] used for the transaction. The lender needs to ensure that, following completion, no third party will have any legal or equitable interest in the property that could jeopardise the lender’s ability to enforce its charge, in the event of any default. 

What additional support is MSB providing in order to get bridging deals completed during these uncertain times?

While we know that many of our competitors have taken the decision to furlough their staff during this difficult period, we have guaranteed that our secured lending department has remained fully operational to ensure our clients receive the same service that they are used to. The firm has made sure that the department has all the necessary resources at its disposal to progress transactions as efficiently as possible. 

What interesting developments have you seen following the recent reopening of the property market with regard to bridging finance? What has the demand been like?

It has been interesting to see how different lenders have operated during these difficult times; some have remained in the market and stood by their regular borrowers and investors, whereas others  have withdrawn from the market completely and evaluated the current conditions and appetite. I always like to champion new way of using technology or where people are trying to be innovative. It has been interesting how some lenders have agreed to use desktop valuations where an LTV is a low risk to push deals through. 

What lessons has MSB learnt as a result of Covid-19 with regard to completing legals on bridging cases? 

The firm, as a whole, had to be able to transition very quickly to working from home and to ensure that we were equipped to continue to service our clients to the standards they are accustomed with. As a firm, we are already extremely diligent in our approach to money laundering and cybercrime and, in these unprecedented times, it has been even more critical that law firms have ensured that they take preventative measures against this threat. Criminals [may] have seen law firms as a venerable target with employees working from home and potentially deviating from their normal practices and procedures.  

Will MSB be making any permanent changes to the way it supports the bridging market?

At MSB, we maximise the use of our state-of-the-art case management system, which enables us to provide detailed, case-specific updates and reports to our clients. We have used the last couple of months to review the data from our system to help lenders identify where transactions have stalled or lost momentum. We have then looked to implement changes to our procedures and systems that will further streamline transactions with regard to the way we interact with our clients and brokers. Since working from home, we have also really enjoyed having Zoom meetings with our lender clients; being able to engage on a video call really helps to build a rapport with people that you work with on a daily basis, as opposed to a traditional phone call. I would personally like to see more people work towards engaging on a video call to find pragmatic solutions to difficult scenarios — I often find that email chains between parties can stifle progress where a quick video call can see problems negotiated and resolved very quickly. 

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