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Irresponsible Lending By Lloyds Tsb

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As an accountant, I have seen irresponsible lending in the past, but last week I was quite literally in a state of shock, after being asked to sign an accountant’s reference for a client. You will appreciate that I have to be careful not to breach client confidentiality, but I can give you the basic details.

He is a self-employed manual worker in his late forties, in a construction related activity. His average earnings from his last 2 years’ accounts are less than £15k per year. :huh:

The bank originally asked for an estimate of his current year earnings and he gave us some information for 7 months that showed that he was having a better year and that, if it continued at this rate, his earnings will be in the region of £38k this year. We stressed that this was based on part year earnings, as reported to us by the client, with a simple extrapolation to project a full year. As one of my staff deals with this client, I was content for him to write a letter to this effect. At that time I had no idea how much they proposed to lend and did not concern myself unduly with this, as they were not asking if we thought he could afford it.

However, the bank has now sent a formal accountant’s reference, which I would have to sign. This states the amount of the loan – and this was when I went into a state of shock.

Lloyds TSB are proposing to lend this man £225,000 :o , which he will be repaying until he is 73 years old. Even if his earnings were to continue at the reported level, this is nearly 6 times the earnings figure that they were supplied with. (His partner is also self-employed and makes about £15k, although they haven’t asked about her. But even if we took the two together, if we used three years’ average earnings, ie the ‘old’ way of doing it, this still works out at over 6 times joint earnings…). :(

Now if this is not irresponsible lending, then what is?? How many 60 year old manual workers do you know who earn close on £40k a year, let alone 70 year olds??? Have Lloyds TSB gone completely mad?? Well presumably they think not – he has a home already so will have a fair sized deposit, so their loan will be (on current valuations) well covered – so presumably they don’t much care whether he can make the repayments.

Now, this puts me in a difficult position :unsure: . Clearly, if I tell the client in no uncertain terms that he should not be borrowing so much, he will tell me to take a running jump – everyone he knows who has borrowed to the limit has made mega-bucks on property, so now it’s his turn and, if the bank will lend, it must be okay and why shouldn’t he jump on the band-wagon with everyone else? Of course he wont still be repaying it when he’s 70 – he will have sold, traded down and retired on the profit long before. And if I’m so stupid as to advise otherwise, then he’ll look for a different adviser. So not much point pressing that one.

I shall of course be totally honest with my reply to the bank, as we were with their initial enquiry, but if I suggest that they shouldn’t be lending this much, they will read this as a coded message that the client is in some way not to be trusted (and I have no reason to suppose this) and would back down. This would be a breach of my professional duty to the client and he would probably get to know and I would not only lose the client but probably find myself in front of a disciplinary hearing.

He will therefore probably get his loan and his new house. We shall cover ourselves with suitable words to make sure that neither he nor the bank can blame us for the ensuing disaster and life goes on…

I am in no doubt who is responsible for the current boom and the forthcoming bust – it is the banks, who can no longer to be trusted with control of the nation’s lending arrangements. :angry:

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He'e self-employed. He has another set of books that includes the cash...... - he's probably borrowing a lot less than 6 times his real earnings and because he's not paying tax on the undeclared, he's got even more cash in his pocket.

Do any of your clients not grin and give you that knowing look or actually look pleased when you tell them just how little money their books show they made last year ?

[of course, he may be the bornagain Christian that puts every penny through and it is irresponsible lending, but I doubt it, the truth will be in the middle somewhere]

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Yep, builders and the like are notorious for cash jobs and various wheezes to reduce "on the radar" income.

Your client is probably feeding you enough information to make his self assesment form look plausible whilst at the same time paying as little tax as possible.

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