Reason why procuration fees are soaring

Lenders’ decision to pay procuration fees has been driven by a switch in the Bank of England’s lending scheme, according to the Association of Mortga

Lenders’ decision to pay procuration fees has been driven by a switch in the Bank of England’s lending scheme, according to the Association of Mortgage Intermediaries (Ami).

In its latest economic bulletin, Ami rejected the suggestion that some brokers withheld applications from certain lenders in protest at their previous refusal to pay procuration fees on transfers.

Instead, the trade body claimed procuration fees were introduced due to the phasing in of the Bank of England’s term funding scheme (TFS), which incentivises lenders to boost net lending in order to benefit from its cheap borrowing rates.

The term funding scheme replaces the Bank of England’s previous funding for lending scheme, which did not provide the same incentives and is being discontinued after January 2018.

Under the new scheme, lenders must factor in the need to demonstrate an increase in net lending in a market where new lending remains subdued by the uncertainty surrounding Brexit and ongoing affordability constraints for borrowers.

Uptake of the term funding scheme by lenders grew from £20.6bn in the last quarter of 2016 to £34.4bn in the first quarter of 2017, with the number of lenders using the scheme increasing from 21 to 28.

The product transfer market – valued at between £80bn and £100bn gross lending last year – is therefore crucial if lenders are to grow their net lending.

The need to retain borrowers on their books and attract new customers increased competition in the market and led lenders to pay product transfer commission, Ami said.

Ray Boulger, senior technical manager at John Charcol, said: “Lenders have increased their net lending in order to qualify for the term funding scheme. If you are looking at a lender doing a lot of gross lending but seeing that walk out the back door, they have to run harder in order to stand still.

“There is also an element of follow-my-leader. If a number of major lenders do something, a number of others will look at that, too.”

Mr Boulger, who is also an Ami board member, suggested a sharp relative fall in the April remortgage figures was due to an increase in product transfer activity – primarily as a result of engaging with brokers.

He added that lenders would have to look more carefully at their criteria in order to attract borrowers against a backdrop of relatively weak market activity.

simon.allin@ft.com

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