Chapter 9 : Suitability of Potential Delivery Vehicles
As evidenced in Chapter 8, there are relatively limited options available to local authorities to provide comprehensive lending options to owners, compliantly, in a relatively short period of time.
The advantages and disadvantages of each of the delivery vehicles is summarised in the following table.
LOAN PROVIDER | HIGH LEVEL ADVANTAGES | HIGH LEVEL DISADVANTAGES |
Each local authority lending directly | - Each local authority would have total control over the operations of the scheme
| - No economies of scale
- No consistency across local authorities - could potentially end up with 32 different schemes offering different products
- Lending is heavily regulated and Equity Loans are new tertiary for local authorities who have limited experience of lending. This could lead to mis-selling of products
- LA's have advised that they do not want to be lenders
- Loan documentation and procedures for each LA would require legal advice to ensure compliance with various regulations including FSA and CCA lending
- Limited experience of staff in some LAs for assessing affordability or suitability of products
- Products would require to be developed
- The commercial market would be less inclined to assist with 32 smaller schemes
- Each LA would be responsible for supplying the capital required for lending
|
RSL's | - Could fit well with RSL's involvement in regeneration programmes
| - New area for RSL's in Scotland therefore delivery risks
- Local authorities would have to negotiate individually or as a consortium with RSL's - neither have experience in this area
- There would be no consistency across local authorities if different RSL's used
- No economies of scale
- May not be a quick option
- Not all local authorities may be able to secure the services of a suitable RSL
|
Credit Unions | - Not for profit community-focussed organisations
- Ability to assess customers' affordability
- FSA compliant
- Officers trained and experienced in offering advice and recommendations
- Can offer customers debt counselling
- Access on website to other relevant services ie benefits advice
- Ability to provide a range of loans suited to particular circumstances
- Trained and compliant staff
- Some offer discount on legal fees
- May be more flexible than high street lenders whilst still lending responsibly.
- SGEI scheme for the provision of guarantees may be available
- Credit unions may be more flexible in developing new products
- View taken on adverse credit
- Could be used for smaller loans and as an additional filter prior to offering assistance from public funds
- Credit unions would use own capital to lend.
| - Only larger credit unions have sufficient funds and expertise to lend on a larger scale and not all local authorities may be able to set up schemes with CUs.
- Credit unions do not currently offer equity loans and new products would have to be developed
- Schemes would not be consistent across local authorities
- May not be a quick option - State Aid, Competition and procurement rules would require to be satisfied
- No economies of scale
- Most credit unions have common bonds and applications may only be accepted from owners within the credit union's area defined by postcode. This would limit LA's working in a consortium.
|
Commercial market | - Fully compliant with all necessary legislation
- Experienced staff
- IT systems in place
- Could use own capital
- Owners would get financial advice from a trusted source independent from the local authority
- Range of market products including equity release loans for over 60.
| - Equity release loans to vulnerable, low income homeowners not commercially attractive proposition to lenders
- Lenders adopt strict lending criteria and decisions are based on credit scoring which would exclude many vulnerable owners
- Current market criteria for equity loans mainly exclude low value properties and/or owners under 60
- Maximum release on equity loans is around 50% LTV
- Most banks and building societies only offer their own products and don't give independent financial advice
- Low value loans to low income borrowers not profitable enough for larger organisations even with subsidy or provision of guarantees
- Lenders will need to see a business case prior to becoming involved. There is limited data available to construct a robust case
- If loan terms breached lenders will call up debt. This could lead to owners beingevicted from their homes
- Lenders base their assessment on a number of things including affordability. Even if a guarantee scheme were to be set up, it is not prudent to lend to owners who cannot afford repayment and a guarantee would serve no purpose in these circumstances. New products are required for these owners
- In the current market where liquidity is an issue for lenders, lending criteria is being reviewed and some products are being withdrawn. It is unlikely that lenders will develop a HAL type loan in the current market
|
ART | - Not for profit organisation
- FSA regulated
- Consumer Credit Act compliant
- Trained staff
- Infrastructure in place
- Experience with English local authorities
- Knowledge of market and issues
- Could be set up in around 12 months if LAs join individually
- Products can be tailored and developed to suit local authorities' needs
- Can provide small unsecured personal loans
- Can provide equity loans to under 60s subject to local authorities requirements.
| - Company based in Birmingham
- As with any third party, the reputation of the scheme and the safety of LA's funds is entirely dependent on the performance and management of the company
- Limited experience in Scotland
- Would require considerable additional resources and the scale of their business would increase by 228%
- A full tendering process would be required
- Time consuming for each local authority if they set up their own arrangements with ART
- If a consortium of local authorities was set up each local authority within the consortium would have to come to agreement about the operations of the scheme. This could be time consuming and LAs may not have experience in this field.
|
HIT | - FSA special exemption
- Capital provided by lenders
- Existing scheme
| - Provide only two products - interest only and roll up interest loan
- Minimum loan £3,000
- Payment of monthly interest preferred
- Limited experience in Scotland
- Minimum age 50
- Loans must meet lenders' normal lending criteria
- Secured first charge lending only
- HAL type loan not available therefore only a small number of owners would be helped by the scheme.
|
Centralised Lending Unit | - Would benefit from economies of scale
- Set up to follow best practice
- Would be FSA and CCA compliant
- Specialised trained staff
- State controlled and run
- May encourage commercial lenders to lever in funds
- Loan book may be securitised in future freeing up capital for reinvestment
- Would ensure a consistent approach among local authorities
- Reputation of scheme would be in the hands of the state
- Products would be tailor made for owners needs
- Best practice from existing SPVs could be adapted.
| - Ambitious project
- May take some time to set up
- Requires public funds
- May never be self funding - would be loss making in early years
- Many bureaucratic hurdles to overcome in set up.
|
Conclusion
Commercial lenders and Credit Unions do not offer a property appreciation type loan which is seen as pivotal to the Scheme of Assistance lending options. Whilst larger Credit Unions may be more receptive to developing new products, smaller credit unions may not have the capital resources and this option may not give blanket coverage of Scotland for all owners. Commercial lenders have no plans at this time to develop a HAL type loan.
Local authorities have advised that they do not wish to be direct lenders and they do not have the necessary experience or infrastructures to lend directly. It is not seen as cost effective for each local authority to set up its own direct lending unit since there is no obvious need for lending processes (as distinct from referrals) to reflect local circumstances.
Registered social landlords may see this as a new business area, however it is likely that it would take considerable time to develop to the extent that it was available across Scotland and would involve local authorities negotiating with RSL's in their area. This option is seen as fairly labour intensive for local authorities in an area which is outwith their core expertise. There is no guarantee that each local authority would be able to find a suitable RSL and there would be a number of schemes in operation resulting in inconsistencies across regions.
The Home Improvement Trust provides a comprehensive service. However, they cannot offer the HAL loan and their products are not available to owners under the age of 50 at this stage. As the Trust acts as a broker and does not lend directly, there is limited scope initially to introduce new products tailored to the needs of owners identified in this report.
ART Homes is currently the only provider of a PAL type loan. Given the need for a full tendering procedure and the length of time needed to work with a new provider to set up the scheme, this option may not offer as quick a path to lending products as is needed. The company is based in Birmingham and taking on an additional 32 local authorities in Scotland would mean an increase in their customer base of over 200%. These factors present delivery risks and further extend the amount of time required to introduce the scheme. As they are the only provider in the market it would be difficult to secure value for money.
In light of the need to have lending options available as soon as possible and the relatively limited options available to local authorities to provide lending themselves the next chapter looks further at the possibility of setting up a new special purpose unit. For working purposes it will be referred to in this report as the National Lending Unit.