Fri 02 Mar 2012

Separate representation for mortgage lenders

The Council of Mortgage Lenders has already developed a new set of lenders’ handbook instructions for England and Wales to deal with separate representation, with a Scottish equivalent to follow some time soon. In practice some mortgage lenders already operate on this basis for high value loans, and other notable lenders appear to be imposing this across the board.

Of course, commercial and corporate lenders will be wondering what all the fuss is about. They almost always operate on the basis of separate representation, the exception being for lower value “de minimis” loans where they are generally happy to instruct the borrower’s solicitor to also act for them.

So what are the issues when it comes to separate representation, and why are residential conveyancing solicitors getting so worked up about it? Here are some of the main issues, with some thoughts:

  • No one likes to feel that they are considered a fraud or negligence risk, or heaven forbid might act in the best interests of one client over those of another client. If a lender has the option to instruct you but chooses to instruct someone else, then is that not one of the first things that might cross your mind. The borrower client will only really care if it is going to cost him more money, and we’ll look at that in a minute.
  • The consensus appears that separate representation inevitably leads to delays – the lender’s solicitor, presumably dealing with volumes of cases, has no interest in an individual borrower’s completion deadline, and will beat time only to the service level agreement agreed with his lender client. That conveniently ignores the fact that most of the conveyancing “factories” (as they are known in rather derogatory terms) are well placed to turn things round quickly and accurately, and their service level is often directly based on the borrower’s date of entry.
  • The borrower’s solicitor will be unwilling to conclude missives or, in England, exchange contracts until he has certain knowledge that the lender’s solicitor is happy with all title and property issues – again more potential delays. This may lead to contracts being concluded “subject to mortgage”, but is that a good basis for a seller to then contract to buy another property. If separate representation becomes the norm, then conditional contracts might similarly become the norm.
  • A purchasing borrower may have taken a “commercial” view on certain issues relating to the property, such as the absence of paperwork for historic alterations, whereas the lender’s solicitor may take a different view if hide bound to follow a detailed set of security instructions from his lender client.
  • One version of separate representation sees the lender’s solicitor taking a certificate of title from the borrower’s solicitor – but that is seen by some as simply adding a layer of administration that the borrower ends up paying for, and for no apparent added value.
  • Separate lender representation means two sets of solicitors and two sets of legal fees, with the borrower ending up paying more. However, why should borrowers meet their lender’s legal fees for putting the mortgage security in place in any event? Some would argue that this has been a convenient truth for too long. We’ve already seen lenders offer “fees free” or “fees assisted” remortgage schemes where the lender meets or contributes to the legal costs of the remortgage transaction. Why should this not be replicated by lenders for purchase mortgages? The reality is, of course, that borrowers will end up footing the bill in any event through higher application or “administration” fees for their mortgage, or through higher interest rates. Solicitors would argue: “better that, than having it wrapped up and hidden within the purchase legal fee”.

While the issue of the lender/borrower exception to the conflict of interest rules is to be reported on at the Law Society of Scotland’s AGM on 31 May 2012, the likelihood is that the status quo will remain. In the meantime the growing signs are that some mortgage lenders are closer to making the change to separate representation across the board than others may think.

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