Britain's Labor Party is looking to regulate the country's mortgage industry and has pegged a subsidiary of subprime lender Cityscape Financial Corp. as the first target.
Paul Flynn, a member of Parliament representing Newport West, Wales, is calling for the cancellation of City Mortgage Corp.'s credit license. The Cityscape subsidiary charges "punitive" rates, Mr. Flynn said in a written statement last week. Mr. Flynn is calling for compensation for homeowners who took out City Mortgage loans, and new laws for mortgage lenders.
Britain's Office of Fair Lending plans to publish a series of guidelines for subprime mortgage lenders this week.
The scrutiny comes as several subprime mortgage companies from the United States have made inroads in the United Kingdom, drawn by the low level of competition and by lenient rules on fees.
Close to half of Cityscape's profits were generated from its U.K. lending subsidiary, the company reported.
Money Store Inc., Sacramento, IMC Mortgage Corp., Tampa, and First Alliance Corp., among others, also have entered the U.K. market in the past two years.
"There is about $40 billion there in subprime equity," estimates Brian Chisick, chief executive of First Alliance. The industry there is "much like California was 25 years ago," he said. "All you have is a very unorganized hodgepodge of little brokers, many of whom only make consumer loans."
In February, the Office of Fair Lending issued a warning to mote than 70 mortgage lenders, instructing them to ensure that borrowers were aware of the terms of their loans.
The Labor Party is now making an example of Cityscape's subsidiary, analysts say, because it is the leading nonconforming lender in England. City Mortgage originated $460 million in home loans last year.
Cityscape, based in Elmsford, N.Y., is also one of the only U.S. lenders there that opted to use the "rule of 78"-a method of computing interest that tacks on high prepayment penalties.
Cityscape has broken no laws in its U.K. lending practices, said chief executive Robert Grosser. Mr. Grosser added that the upcoming guidelines should "clarify practices and level the playing field" for nonconforming lenders.
Still, Cityscape has said it plans to stop using the rule of 78 for figuring payments after Aug. 1.
First Alliance is opening three additional branches in England, which would bring its total to four. The company computes interest rates in England just as it does in the United States, Mr. Chisick said.
Competition for subprime borrowers is slight in England, because banks fled the market after a real estate downturn in the early 1990s, Mr. Grosser said.
U.S.-based companies with securitization experience were able to come in and monopolize the industry, he said, but it is still in the incubator stage.
Increased regulation is unlikely to put the kibosh on the growing subprime mortgage market in England, said Kevin Spinner, an analyst with Keefe, Bruyette & Woods. "It is still going to exist," he said. "It's just a question of how profitable it will be.' ' u