Understanding regulated bridging loans for lenders

As companies make up the majority of borrowers in the UK’s bridging market, for many bridging lenders the question of whether a bridging loan is regulated or unregulated rarely arises, since lending to a corporate borrower will, in most cases, mean the loan is considered unregulated.

However, should a non-regulated bridging lender find themselves lending to an individual borrower, specifically in relation to purchasing or refinancing a residential or mixed-use property, care must be taken to ensure that the bridging loan does not meet the definition of a regulated mortgage contract, as failure to do so can lead to severe criminal and financial consequences.

What’s a regulated bridging loan?

Regulated bridging loans are regulated by the Financial Conduct Authority (“FCA”) and can only be provided by authorised lenders, which are therefore under the strict supervision of the FCA. As such, regulated bridging loans offer various protections to consumers, including, but not limited to, stringent affordability checks, fair treatment of arrears, access to legal redress, and protection against unfair terms.

In contrast, unregulated bridging loans are not regulated by the FCA and do not offer consumers the same protections.

Defined under article 61(3)(a) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”), a contract is a regulated mortgage contract if, at the time it is entered into, the following conditions are met:

• (i) the contract is one under which a person provides credit to an individual or to trustees;
   
• (ii) the contract provides for the obligation of the borrower to repay to be secured by a mortgage on land;
   
• (iii) at least 40% of that land is used, or is intended to be used:
   
  • (aa) in the case of credit provided to an individual, as or in connection with a dwelling; or
     
  • (bb) in the case of credit provided to a trustee which is not an individual, as or in connection with a dwelling by an individual who is a beneficiary of the trust, or by a related person.

As alluded to above, if at the time the agreement for the bridging loan is entered into, the loan is made to a company, unless the company is acting as a trustee, the loan will always be considered unregulated. However, if the loan is being made to an individual and the obligation to repay is secured by a mortgage over land, and at least 40% of that land is being used or is intended to be used as a home, this is almost always the case with residential property, and in some cases mixed-use property, then the loan will be considered regulated.

In other words, if a non-regulated bridging lender finds themselves lending to an individual specifically in relation to residential or mixed-use property, then there will always be a risk that they are entering into a regulated mortgage contract.

So, what can be done to avoid the regulatory regime?

Non-regulated bridging lenders mainly rely on two exemptions as set out in article 61A(6) of the RAO, namely:

• Second charge business loans.
• Investment property loans.

Second charge business loans

“Second charge business loan” is a contract that, at the time it is entered into, meets the conditions in paragraphs (i) to (iii) of article 61(3)(a) and the following conditions:

• (a) the lender provides the borrower with credit exceeding £25,000;
   
• (b) the mortgage ranks in priority behind one or more other mortgages affecting the land in question; and
   
• (c) the agreement is entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.

The key requirements to benefit from this exemption are that the principal loan is above £25,000.00, the mortgage ranks behind in priority to another mortgage, usually in the form of a second legal charge, and the loan is entered into in the course of carrying out business.

This exemption is typically used when lending to an individual who simply wants to draw funds for a business.

Investment property loans

“Investment property loan” is a contract that, at the time it is entered into, meets the conditions in paragraphs (i) to (iii) of article 61(3)(a) and the following conditions:

• (a) less than 40% of the land subject to the mortgage is used, or intended to be used, as or in connection with a dwelling by the borrower or (in the case of credit provided to trustees) by an individual who is a beneficiary of the trust, or by a related person; and
   
• (b) the agreement is entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.

The key requirements to benefit from this exemption are that neither the borrower nor their relatives will use the property as a home (or will occupy less than 40% of it) and that the loan is entered into in the course of carrying out business.

This exemption is typically used for buy-to-let investment properties.

Other key considerations

In order to benefit from either of the above exemptions, there will need to be a statutory presumption that the individual borrower was acting in the course of carrying out business and as such it is vital to obtain a written declaration from the individual borrower in the prescribed form confirming the same; investment property loans will require an additional declaration in relation to occupancy as confirmed in Kumar and others v LSC Finance Ltd.

Guidance from our real estate finance solicitors

Our real estate finance team advises lenders, borrowers, brokers and investors on a wide range of secured lending and bridging finance matters involving residential, commercial and mixed-use property.

Working with clients in London and nationwide, we provide practical legal support on bridging loans, development finance, refinancing transactions, and complex property finance arrangements.

Get in touch to speak with our real estate finance solicitors.