In the latest of a series of articles, experts from Titlesolv, a leading provider of title insurance and indemnity solutions, explore one of the key elements of risk for the lending community: the Mortgage Market Review.
In the run up to the implementation of reforms pursuant to the Mortgage Market Review, the debate largely centered on the importance of the review and the impact of the reforms on the mortgage market. Already at the time of writing, the mortgage lending data for the month of May suggests a link between the reforms and the cooling down of overheating housing markets. However, whilst the analysis has focused on market impact, there has been comparatively less discussion of the related implementation of good lending practices which has a direct impact on mortgage book profitability, quality and value.
New trends are always emerging within the lender and associated insurance circles in an attempt to exploit the peaks and troughs of the property cycle. Despite this, the one constant is the clear benefit of having a well-documented and thorough lending manual, backed up with substantive internal systems and controls, further fortified by the standardised guidance provided in the various CML handbooks. For a title insurance policy which is aimed at insuring latent title defects within a loan origination process, these checks and balances can be critical. Well-documented and streamlined lending practices can pay dividends for lenders in future years, whether that be for making claims against title insurance policies, for defending claims directly or for improving the attractiveness of their loan portfolios on sale.
The first of these dividends relates to proof of loss. When a title insurance claim is made, a clear and accessible file will make it much easier for the claims handler to analyse the claim and in particular to determine whether the conditions precedent for cover have been complied with. This allows for a much more seamless and efficient claims resolution process. For loss-based insurance policies the ability to demonstrate good lending practice and to set out the decision making process involved will enable a lender to prove its loss without question.
The second of these dividends relates to protection, in particular protecting against allegations of contributory negligence in a claim scenario. In the early 1990s following the leading case Banque Bruxelles Lambert SA v Eagle Star [1997] AC 191 (known as BBL) , when lenders started to seriously consider recovery from negligent professionals the question of contributory negligence was not considered a significant barrier to recovery. Now, it can be a serious consideration both when deciding whether or not to litigate and in terms of the eventual financial recovery either from the borrower or from a title insurer. A lender which can substantiate its decision to lend and back it up with consistent lending criteria and sound loan underwriting is better able to defeat allegations of contributory negligence.
A third dividend to lenders which is directly related to good lending practices is the ability for good lending practices to enhance the attractiveness of a loan portfolio in the context of a sale or securitisation. A well-documented lending policy supported by rigorous back office processes will create value and can significantly curtail the due diligence process.
The movement towards greater focus on good lending practices introduced by the Mortgage Market Review may at face value appear to a lender to be skewed in favour of the consumer. However, when examined more closely, specifically in the context of the indirect dividends which good lending practices would pay, what might have originally presented itself as a tedious, resource consuming exercise for lenders may yet prove to deliver noteworthy benefits to their bottom line.
Titlesolv is a trading name of London & European Title Insurance Services Limited authorised and regulated by the Financial Conduct Authority
Jill Forsyth, Legal Counsel & Compliance Manager, Titlesolv
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