Councils face legal challenges over LOBO loans

Newham Council is facing legal challenges over its use of Lender Option Borrower Option (LOBO) loans. More councils around the country are coming up against criticism for choosing this type of finance. What are LOBO loans and why are there objections to them?

LOBO loans explained

LOBOs are long-term, variable-rate, derivative-based loans. This finance option can protect the borrower from rising interest rates but, if rates fall – as happened in 2008 – then the cost of repayments increases. The UK's councils owe more than £11 billion in LOBO loans, and Newham Council alone has taken out 27 LOBOs amounting to £564 million.

London Assembly candidate Rachel Collinson has written to auditors PwC requesting that they examine the legality of Newham Council's loans. The hope is to have the LOBOs declared an 'irrational' expense, and therefore illegal.

A confusion of figures

Councils could have obtained finance directly from the government through the Public Works Loan Board (PWLB). Financial Analyst Nick Dunbar claims that the 48 councils that took out LOBOs have had to fork out an additional £28.2 million in interest costs compared with if they had taken out fixed rate loans from the PWLB. However, Newham Council doesn't accept these figures and claims government funding would actually have been £64 million more expensive. It maintains that its LOBOs are "prudent, affordable and sustainable".

Ms Collinson argues that the loans were mis-sold by the banks. The relationship between the consultants and brokers has also been called into question, with concerns raised as to how independent and impartial these professional services have been.

PwC's findings on the loan deals remain to be seen. In the meantime, councils with LOBOs face a choice between interest rates of up to 7.6% or paying extortionate exit fees. Ethical Enforcement Agents such as Dukes Bailiffs can assist councils with cash flow problems through the collection of any outstanding arrears. If you work for a council and are concerned about protecting your cash reserves, speak to our Contact Centre Manager today.