The trade body for bridging lenders has issued a strongly worded rebuttal defending lenders and claims ASTL members are “committed to provide transparent pricing”.
It also said to its knowledge it does “not believe that any attempt has been made to mislead customers” taking regulated bridging loans.
It comes days after Mortgage Introducer revealed some bridging lenders face paying customers hundreds of thousands of pounds in redress after the FSA said retained interest calculations fail to comply with MCOB regulation.
Benson Hersch, chief executive of the ASTL, said: “It is up to each member to decide how to charge for their loans.
“In any case, the primary consideration of the customer has always been (a) how much net funds are received for the loan and (b) how much is to be paid back.”
And he said: “The retained interest product provided a useful funding method for customers who do not have the cash flow to afford a short term loan but are able to afford a long term loan or are selling the property being secured.”
The trade body also claimed the use of retained interest has never been hidden from the FSA.
And Hersch refuted suggestions that regulated bridgers would have to stop using retained interest calculations in future.
He said: “No objections have been raised about using retained interest, only how it is explained to the borrower.”
And he added: “In any case, the headline rate is only one of the elements that make up the cost of any loan; and that is precisely why the Key Facts Illustration was designed to show the total cost of borrowing, detail all charges and highlight the APR as a rate which would take both the amount and the timing of charges into account.”
Hersch also said bridging charges are determined by the market and by the risk-reward ratio that each lender considers to be reasonable.
Last week the FSA wrote to all regulated bridging lenders in the market telling them the “interest rate produced by this calculation method does not accurately reflect the product interest cost and is unclear”.
The letter said the regulator was concerned this method misled customers by quoting one rate of interest but charging a higher rate because interest is charged on rolled up interest added to the principle before it is required.
A spokesman from the FSA said: "We have written to regulated bridging lenders because we are concerned that some of them are using retained interest calculation methods that are in breach of our rules.
“In particular, we are worried that these calculations produce an interest rate that is unclear, unfair and misleading - and are therefore likely to result in consumer detriment.”
The FSA urged lenders to “consider action to identify the scope of customer detriment and make redress where it is fair and reasonable to do so”.
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, said: “AMI remains prepared to work with ASTL to help them understand better the workings of mortgage regulation and to ensure that all parties to the market avoid falling foul of the rules.
“We can attest through PPI that previous FSA silence was not any help in the final analysis."
The FSA letter contained the following retained interest calculation example.
A customer requires £100,000 loan for 6 months. The product interest rate is quoted at 1.25% per month (x 6 months = 7.5%).
The firm calculates the interest to be charged and adds it to the loan at inception. Interest is also charged against the interest that has been added to the loan.
Total interest added to the loan equates to £8,108 for the six months period which is equivalent to a simple interest rate of 8.108%.
The customer is in effect being charged an interest rate higher than the rate of 1.25% that was promoted and as such, the product interest rate in the illustration does not accurately reflect the interest charge of the regulated mortgage contract.
