20 November 2015 by

Another banking scandal….

The latest scandal to emerge from the banking world is the uncovering of the cost of “Lender Option Borrower Option” loans, otherwise known as ‘LOBOs’, to local authorities and housing associations who have bought into them across the UK. There are an estimated 8 billion pounds worth of LOBO loans in our local authorities’ funding portfolios, with tax-payers concerned to find that their money is being diverted away from much needed public services in order to fund the banks’ increasingly onerous interest payments.

When money is tight and local authorities don’t have sufficient funds to maintain services or fund re-development, they, like private sector businesses, need to borrow to cover the expense. This is where LOBO loans come in. A LOBO is a form of loan agreement in which the underlying facility is typically long-term, with many spread over 50-70 years. However, the facility allows for the lender, on pre-determined future dates, to propose a new fixed rate for the remaining term of the loan. If the borrower decides it cannot afford the increased interest rate, the “option” allows the lender to request that the outstanding loan amount is re-paid in full, with an additional exit fee payable on top. Some exit fees are reportedly reaching into tens of millions of pounds, leading to many local authorities being trapped into repaying the high interest rate loans, completely at the mercy of the banks. It all seems very much a win-win scenario for the lenders, ultimately at the tax-payers’ expense.

LOBO loans became a popular choice of funding for local authorities when banks realised they could offer lower interest rates than the usual centralised lender, the Public Works Loan Board (PWLB). The initially low interest rates were, and are to this day, appealing to any cash strapped local authority, but with high commissions at stake for brokers, some earning very large commissions for each deal done, it has been suggested that proper independent advice wasn’t given to borrowers prior to entering into these arrangements. The result has been unexpected hikes in interest rates, which far surpass those rates charged by the PWLB, leaving local authorities’ budgets ever diminishing.

It is likely that, as more and more freedom of information requests are submitted by those committed to transparency in local authority lending, the true extent of the LOBO loan scandal will emerge and claims may well be made for mis-sold loans.

If you have any questions regarding your loan arrangements, or feel that you have been mis-sold a loan or other financial product, please contact Lauren Fitzpatrick on 020 7288 4751 or laurenfitzpatrick@boltburdon.co.uk

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