The Association of Short Term Lenders (ASTL) has amended its code of conduct to ban its members from the practice of back charging on bridging loans, reported MortgageSolutions.co.uk in February 2017.
To attract borrowers, many bridging lenders offer low promotional interest rates for new borrowers. If a borrower defaults on repaying the loan, some lenders then raise the interest rate to their standard rate. Back charging is the process of applying this higher rate to the whole period of the loan instead of just the remaining time left.
Though banning back charging apples only to members of the ASTL, it is hoped that other lenders not in the association will follow suit. The practice of back charging was not widespread in the lending industry anyway, so stopping back charging will only affect a few borrowers.
Kit Thompson of the Association of Short Term Lenders, commenting on his association’s changes to its code of conduct to ban back charging, said:
“This practice is outdated and unethical. It shouldn’t have been allowed in the first instance. I am not saying that if a borrower defaults they shouldn’t be charged a higher rate of interest, but the issue is one of transparency and fairness.”
Most regulated bridging lenders are professional and abide by the ASTL code of conduct, but there are unregulated lenders who operate with questionable ethics. Brokers can guide their clients in finding bridging loan deals from lenders who uphold the integrity of the ASTL.