Jeff Salway: Fears grow over homebuyer fees

Buyers and sellers may have to wait more than two months to move home due to the new rules. Picture: Ian Rutherford
Buyers and sellers may have to wait more than two months to move home due to the new rules. Picture: Ian Rutherford
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OPPOSITION is growing to a proposed rule change that could add to the costs incurred by homebuyers and hinder the housing market recovery north of the Border.

The Law Society of Scotland has sparked controversy by announcing plans to prevent solicitors from being able to act for both the lender and borrower in a house purchase transaction.

Mortgage fees ruling paves way for further claimants

The Scottish Government has been urged to step in to protect consumers north of the Border from a measure that could mean buyers forking out extra money for solicitor fees.

Some brokers also believe that separate representation could result in the typical sale completion time doubling to two months or more.

Under the proposed change, expected to be ratified in September, borrowers in Scotland will have no option but to use an additional solicitor. The Law Society, which had previously voted against the mandatory separate representation, now claims the move is necessary in tackling conflict of interest.

It argued that there are conveyancing cases in which it is difficult to align the interests of both the borrower and the lender. Recent changes in the housing market had left it with no alternative but to act, said Austin Lafferty, president of the Law Society of Scotland.

“The severe economic downturn, increasingly complex transactions, increasing risk of mortgage fraud and the additional pressures from lenders mean that it is no longer appropriate, and indeed is arguably not in the public interest, to continue,” he said.

Solicitors say lenders are increasingly claiming negligence against them where borrowers have slipped into negative equity or defaulted on their repayments, or where there has been mortgage fraud.

Lenders have responded by tightening up their solicitor panels, leaving many firms out in the cold.

“Despite the downturn and increased requirements for any prospective borrower, mortgage fraud has been on the increase, and restricting which solicitors can undertake transactions makes managing the risk more controllable for lenders,“ said David Rolleston, director of Mortgage Advice Brokerage in Glasgow.

“But the cynic in me says this is just a way of solicitors generating more business and income for themselves at the expense of the clients they are representing.”

Banks and building societies were consulted on the proposal, according to Lafferty. However, the Council of Mortgage Lenders has described it as a protectionist measure that goes against consumer interests and will impose added costs.

Mike Dailly, principal solicitor at Govan Law Centre, also dismissed the Society’s move as “protectionism”.

“After decades of solicitors acting for both lenders and borrowers in house purchases, the public will find it hard to understand how there is suddenly a conflict of interest which means you will need two sets of different lawyers with two sets of bills to pay,” said Dailly.

He called on the Scottish Government to intervene to protect consumer interests.

“This could not have come at a worse time, given our depressed housing market,” Dailly added. “If there is an actual conflict then separate representation will be required, but there is no evidence that a conflict arises in every single transaction, so why a blanket ban?”

The Society insists that any extra costs to homebuyers should be borne by lenders, with banks and building societies being to blame if its proposal resulted in added expenditure for borrowers. Lafferty said he did not “foresee any astronomical price rises”.

However, it seems likely that borrowers will pay the extra price either directly or through an inflated mortgage arrangement or administration fee. Rolleston warned that, regardless of the Society’s assurances, its proposed change will increase costs for anyone wishing to buy a home in Scotland.

“A second solicitor being involved will incur additional costs and I don’t believe that the solicitor acting for the client will reduce their fees to reflect the reduction in work that they will have by not having to do the due diligence for the lender,” he said.

Buyers also face the hassle of another layer being added to the process and the delays that may cause. For example, where there are two solicitors undertaking the conveyancing, there will be enquiries to be raised with each other and details to be cross-checked.

“If anything, it will slow down the process,” said Rolleston. “No more four-week completions: the chances are that what was a four to six-week process could easily become an eight to ten-week process or longer.”

One of the UK’s biggest lenders already operates a separate representation system. HSBC was criticised by the Law Society of Scotland last year when it restricted the panel of solicitors that it would work with to just four firms north of the Border. HSBC customers wanting to use their own solicitor have to pay a fee of £160 plus VAT, adding up to £192.

At the time, the Society described the fee as an “unwelcome imposition” on bank customers and said it would reduce consumer choice.

But Rolleston said: “I don’t recall the Law Society of Scotland being advocates of the process that HSBC introduced, and recent discussions with solicitors who have had experience of dealing with them have been far from positive.”

• For details on reclaiming mortgage fees click here