LOBO Loans

Author: Suman Mongia
Publish Date: March 28, 2019

Introduction

A sudden withdrawal of central government funding has exposed the crisis in local government. As a result, there is hiking in council tax and making resident services paid that was free once. This hits the poorest badly. Local authorities need to ensure stable funding to manage their duties, instead of that they are seeking money from market through capital market, involve in speculative activities. Due to it, this LOBO came into picture where these expensive and risky loans were sold to many types of councils across UK.
Lender Option Borrower Option as the name suggests in LOBO Loans the lender has the option to raise the fixed interest rate and borrower has the option to accept the new interest rate or to repay the loan.It’s a long term loan, typically for 40-70 years.
Earlier in UK the amount of loan was limited by PWLB (Public Works Loan Board) because of which LOBO loans came into picture. Banks started providing LOBO loans at interest rates lower than PWLB (Public Works Loan Board) which attracted the councils. Gradually these interest rates increase sometimes even twice in a year. Also, if the borrower is willing to repay loan early it would need to pay penalty charges which is also called “break penalty”. These penalty charges can go as high as 90% of the loan amount.
LOBO loans have been described as a “lose-lose bet for councils” because of the one-sided terms of the loans which makes sure that the banks always win. Banks such as Barclays, Dexia, Depfa and RBS which are major issuers of LOBOs making huge profits from tax payers’ money which should be used for welfare of residents.
Over 240 councils across the UK have taken out LOBOs worth a total of £15bn. They are highly in debt. In fact, a large portion of their income from council tax is used to repay debt. Some LOBO loans currently have interest rates as high as 11%.

The biggest banks selling LOBOs were Barclays, Dexia, Depfa and RBS

The largest borrower Newham council is in debt with £563m worth of these loan instruments. The council spends approximately 77% of its income from council tax. Newham is one of the poorest boroughs in the UK where 43% of children grow up in poverty.
Newham council has also filed case against RBS and Barclays regarding the terms of in complex bank loans proceedings are understood to be ongoing.
LOBOs are under investigation by the group Debt Resistance UK (DRUK). DRUK’s campaign, #NoLOBOs, aims to both expose the truth and make the case that such loans are illegitimate.
Earlier in 80s there was a ruling called Hammersmith and Fulham vs Goldman Sachs case. where local councils had entered into hundreds of swap contracts presenting significant risk to local government finances across the country. The judgement was passed by court that it is beyond the power of councils to invest taxpayer’s money in such gambles. And all swap contracts were cancelled.
Debt Resistance UK is making the case that such debt is illegitimate. Debt Resistance UK questions if it is legitimate that human rights of residents are being put second to the interests of the banks.

Seven UK councils sue Barclays over high-cost loans

High court claim has been filed against bank over expensive interest payments

Seven local councils including Greater Manchester have borrowed up to £573m in lobo loans from Barclays. LOBOs became popular among councils as they came with teaser interest rates that kept payments low over short term.
The loans give privilege to banks to increase interest rate at certain point over their lifetime. Although borrower has the option to reject that term and repay full payment immediately.


Reference: https://www.theguardian.com/business/2019/jan/31/seven-uk-councils-sue-barclays-over-high-cost-loans

Newham LBC to sue RBS over £150m in LOBO loans

Newham London Borough Council is to sue the Royal Bank of Scotland over £150m worth of LOBO bank-loans, making it the latest council to take legal action against banks on highly controversial loans.


Reference: http://www.publicsectorexecutive.com/Robot-News/newham-lbc-to-sue-rbs-over-150m-in-lobo-loans