New Regulation On The Block
Since the introduction of new rules for portfolio landlords at the end of September 2017, we’ve watched with interest as the market has responded. We’re now a few months into the new regime and are seeing the initial regulatory challenge become a much wider and nuanced issue, creating opportunities and benefits for the entire buy-to-let (BTL) mortgage supply chain.
Following a review of the BTL market in 2015/16, the Prudential Regulatory Authority (PRA) introduced new underwriting standards in a bid to reduce riskier lending. Since 30 September 2017, landlords with four or more mortgaged BTL properties have been required to submit income and mortgage details on their entire portfolio each time they need additional lending on one of their properties. For the first time, this has meant bricks and mortar assets have become the subject of regulatory scrutiny, rather than just the individuals involved in a mortgage transaction.
A pleasant surprise
Regulatory change can often be burdensome and, for an industry with no previous standards in this area, stakeholders were understandably anxious about how to deal with the new requirements. Lenders, intermediaries and portfolio landlords themselves were unsure how the new rules would affect them and there were concerns about how an already niche market would cope with the additional administration. However, what we’ve seen is that for those with the right technology in place, navigating the new regulatory landscape has been dramatically simplified, creating a unity in a hitherto fragmented market and generating more business opportunities for those quick to take advantage of this market development.
Mortgage intermediaries are instrumental to the ongoing success of the BTL market. As the main point of contact with their portfolio landlord clients, brokers have been quick to harness technology, but remain critically aware that theirs is a people business and that technology must be balanced with an ongoing human touch. Data and people need to coexist as technology plays a greater role in mortgage transactions. Brokers have a key role to play in explaining to their landlord clients how lenders are implementing online solutions and ensuring all those involved understand how things work within the context of the new regime.
One such issue is the business of property portfolio submissions. For many lenders, properties which were to date considered to be background properties had not featured prominently in underwriting decisions, but the new rules have brought these assets to centre stage. With the regulatory spotlight now focussed on a landlord’s entire portfolio, online data submission with automatic upload of spreadsheets that could be in multiple file formats has simplified and expedited this process. The option for portfolio cloning to allow applications to be considered by multiple lenders has brought further efficiencies, especially when cases get declined perhaps through failure to meet a lender’s stress test requirements. Even for landlords with smaller portfolios, keeping data on tenants, values, rents and EPCs up to date is a difficult task; by their very nature, portfolios are complex and always changing. Consider that many landlords have 50 or more properties, and the power of an automated online platform becomes all the more apparent.
Technology has brought additional functionality including links to automated valuation models and the provision of real time, fully configurable lender rules on interest rates, thresholds and tolerances, which means the problem of manual data gathering is completely removed. With lenders able to configure rules in this way depending on their appetite for risk, lending decisions can be delivered more quickly and accurately, with everyone involved enjoying increased confidence in a more robust process.
Adrian Moloney, Sales Director at OneSavings Bank, can attest to the power of harnessing technology:
“Although it was always going to be the case that the administrative burden of the PRA regulation would be most harshly felt by brokers and their portfolio landlord customers, many we spoke to in the lead-up to the changes told us that they felt under-prepared for its implementation. That’s why we introduced the Buy to Let Hub by eTech, a dedicated submissions platform, which has helped simplify the process and ease some of the load for brokers. The system has enabled brokers to upload, monitor and manage the portfolio element of their applications using one intuitive dashboard, with a robust back-end that has empowered us a lender to make quick and accurate decisions.”
Seizing the opportunity
The BTL market has to date enjoyed niche status, and the increased amount of regulation could have posed a real threat to its ongoing success. However, since last September, we’ve seen both specialist and mainstream lenders respond to the new regulations as fresh opportunities arise for increased collaboration and data sharing.
The introduction of the PRA’s new rules has allowed technology providers to take the next logical step in their product offering by aligning regulatory imperative with the rest of the online mortgage journey. However, as well as streamlining and ‘professionalising’ an important legal element of our industry, there have been several unintended (and positive) consequences of the regulation.
As we’ve already noted, increased cohesion in a previously fragmented market has been one immediate consequence of the new rules, as users of technology work more closely together than previously to share data in real time. This has resulted in better data standards; improved data outputs on the breadth and depth of a portfolio help lenders better understand a landlord’s portfolio position. As well as enabling lenders to make better decisions on finance, this also allows them to inform future product strategies as they build a comprehensive picture of multiple portfolios and their varying requirements in terms of lending products. Furthermore, the increased insight lenders are afforded into landlords’ portfolios is gold dust in data terms, with information on other lenders involved, values, EPC ratings and property type proving invaluable to other interested parties like financial risk teams.
The PRA rules haven’t been the only challenge to the buy-to-let market in recent months. Changes to tax charges, stamp duty and EPC requirements have all placed an extra burden on stakeholders. Consider also the incoming house in multiple occupation definition changes due this autumn and it’s clear both brokers and lenders need to be on the ball in order to sustain a presence in this market. Investment in the right technology has been essential for serious players to stay in the game.
Maintaining good relations
Adrian Moloney also comments on the opportunities to improve relationships with all parties:
“If anything, the PRA’s tightening of the rules has been a good thing for the sustainability of the sector. There’s no doubt that greater scrutiny on loan affordability has added more of an administrative burden but it also helped clarify the challenge for lenders and compelled them to work in partnership with their brokers to implement technology that worked effectively for both parties. The new rules effectively changed the dynamic of the relationship between lenders, brokers and technology providers, by compelling them to work together to find a solution that yielded positive customer outcomes.
“We’ve always put brokers at the heart of our business strategy but now we have a new outlook on how we navigate stricter underwriting regulation. We see the use of technology as fundamental for our future success but only if it is appropriate and meets the needs of everyone within the supply chain.”
From uncertainty and apprehension at the launch of the new regulations, we’ve seen brokers, lenders and landlords take a journey via an industry-wide solution, facilitating straightforward navigation of the PRA rules, streamlining and professionalising data standards, and bringing increased cohesion to the entire BTL community. By working closely with stakeholders to ensure technology stays one step ahead of subsequent changes in the market, we’re confident that the future for property risk management is one full of yet more opportunities for those keen to invest in technology.