Lender Exchange ahead

There has been much debate over the course of the past 18 months or so on the subject of separate representation of the borrower and the lender in residential property transactions. As matters stand, the Law Society of Scotland’s Regulatory Committee is considering the options further in light of the views expressed for and against the proposal at last year’s special general meeting. A Society working party is to engage with the Council of Mortgage Lenders (“CML”) in order to frame “fairer and more relevant” rules for Scotland, by introducing amendments to the CML Handbook which will hopefully better reflect Scottish practice and procedure – it being noted that any change to the CML Handbook would require to be approved by the CML Legal Advisory Panel and the Handbook Oversight Group before any approval is given. It is envisaged that a progress report will be provided at the Society's AGM on 4 April 2014.

The Council of Mortgage Lenders

The CML is a trade association for the residential mortgage lending industry. Its purpose is to represent mortgage lenders and promote sustainable housing finance in the UK (see https://www.cml.org.uk). All recommendations made by it require to be approved by members: see above. That can, on occasion, lead to negotiations becoming somewhat protracted.

It is acknowledged that secured lending is a very important feature of the residential property process. It is, in many respects, the oil that lubricates the whole process. As a result, the view of lenders and therefore the CML should be considered and there should be regular dialogue with the Society. The view from a large part of the profession, however, is that all that they see is a steady stream of change at the behest of lenders, and that such change is always focused on the solicitor’s role in proceedings with the spectre of increased liability. Lenders, on the other hand, argue that there is no change to the underlying duty of care that a solicitor owes to his/her client – in this case the lender – and that all they are doing is simply setting out what these duties are, for example with regard to so-called back-to-back transactions etc.

These views aside, the authors are of the opinion that there is an inherent conflict of interest between the interests of a borrower and a lender which can no longer be reconciled. Many good arguments in favour of preserving the status quo were tabled prior to the SGM, but none of them really addressed that core issue. Put simply, we are seeking to defend an exception to a general rule which has run its course and which requires to be changed. Those who oppose change would do well to remember that a claim made against them by a lender will be based on breach of contract rather than alleged negligence – the contractual relationship being based on the CML Handbook.

The way forward

What then of the future? We will require to await the outcome of the Regulatory Committee’s deliberations, and also the ongoing discussions with the CML – especially as to what is meant by “fairer and more relevant rules for Scotland”. In the meantime, changes are being made by a number of lenders with the introduction of Lender Exchange by Decision First Ltd, a joint venture company between Decision Insight Information Group and First Title plc. Individual lenders have been communicating their positions to solicitor firms on their lending panels. It is proposed that the scheme will be operational by the end of Q1, 2014.

Lender Exchange is a web portal which aims to address the issue of multiple lenders seeking similar information from solicitors in order to better manage their panel systems. The aim is to reduce costs and the administrative burden on solicitor firms, while also helping the lenders minimise fraud and negligence through due diligence.

Information is gathered by Decision First and a fee is paid based on the size of the firm. Once in the system, the information need not be further updated unless there is a change to individual details such as an amalgamation or if a partner has been found guilty of professional misconduct etc. The obligation will be on the firm to advise Decision First so that Lender Exchange can be updated. The lenders who are leading the way with Lender Exchange are Santander, Lloyds and RBS, with others to follow. The system is open to all lenders who wish to participate.

Lender Exchange was first proposed in England & Wales. The Law Society of England & Wales (LSEW) has decided that it is not now in favour of the concept, and communication between the CML and LSEW has become somewhat strained as a result. The Law Society of Scotland has published information on the concept on its website and invited views from members. So what is likely to happen?

Lender Exchange is being promoted by lenders – not the CML – and it is understood that it will be introduced. The important issue, however, is the level of detail of the information sought by lenders. There is a fair degree of resistance so far. At present, some lenders require a minimal verification of ID prior to granting membership of their solicitor panel. Others require detailed information including criminal record checks.

It is suggested that it is not the detail of the information itself that is the issue here, but the level of input that the Law Society of Scotland may have prior to a set of criteria being established. As we understand it, the Society has offered discussions with representatives of lenders who are in the vanguard of the proposal. That is a positive development. One benefit of the forthcoming digital authentication system contained within an electronic practising certificate is that information can be accessed electronically by lenders via Lender Exchange without further manual input. It is suspected that lenders may be unaware of these proposals.

Mutual benefits

Lender Exchange is designed to allow lenders to communicate better with solicitors on their panels by electronic means rather than the present outdated requirement that fax be used. An added benefit is that solicitors should also be able to communicate in a secure manner with other solicitors on the portal, thus creating a secure dealing room on which conveyancing transactions can be carried out. This would be a good example of solicitors and lenders working together, irrespective of any decision with regard to separate representation. This would be a positive step forward, so long as it is introduced as a result of collaboration with and input from the Society on behalf of members. Anything less is a missed opportunity.

Lender Exchange will be introduced. Now is the time for the Society to provide input to Decision First on how best the system can be modelled to work in Scotland.

When all is said and done, however, solicitors must continue to be aware of their contractual responsibilities to their lender clients and act accordingly.