Lender option borrower option or lender's option borrower's option (LOBO) is a long term borrowing instrument available in the United Kingdom. They involve periodic interest re-fixings, which incorporates two linked options:
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They are provided by banks and the loan contract runs for between 40 and 70 years. There is no regulatory body responsible for overseeing their use.
Origins
Public bodies used to be only able to borrow money through government Public Works Loan Board (PWLB) loans. However borrowing from banks in the form of LOBOs was permitted from the early 2000s. LOBOs were made available with low teaser rates, cheaper than PWLB loans so they appeared to be an attractive alternative. Few councils had access to the complex option valuation models required, nor the market data needed as inputs for such models.
Criticism
LOBOs have provoked criticism because of high initial profits to the lender from day one and high subsequent interest rates. Clive Betts, MP and chairman of the Communities and Local Government Committee, has called for an inquiry into ‘outrageous’ LOBO loans. These criticisms have been refuted by some of the borrowers.
Local councils
Campaign group Debt Resistance UK researched LOBOs using the Freedom of Information Act. Banks, such as Barclays and Royal Bank of Scotland (RBS), provide LOBO loans to about 240 UK councils (63% of all councils in 2013) with a total value of £15 billion. Out of this £15 billion it is estimated that about £1 billion in upfront profits was made by the lenders. LOBOs are currently almost a fifth of all council borrowing.
LOBOs were recommended to councils by specialist financial advisers who, unknown to the council, were in turn paid commission by the banks providing the LOBOs.
At least 12 councils have the most expensive types of LOBO loan. Most of these have "inverse floaters" taken out with RBS - interest rates for the loan are increased if general bank lending rates decrease.
As a direct consequence of making repayments on LOBOs, councils have had to make major cuts in services to their residents. It has been calculated that if councils were free to relinquish their LOBO contracts at no penalty and instead borrow at a more typical market rate it would save them about £145 million for 2015 alone. Some councils are considering taking legal action.
Some residents of councils with large LOBO loan books have requested that auditors take their council to court under provisions in the Audit Commission Act. Newham resident and Green Party spokesperson Rachel Collinson was the first to do so, requesting the then auditor of Newham Council's accounts, PwC, to declare the spending on LOBO loans to be ultra vires, or technically illegal, being beyond the council's powers. This is because LOBOs are packaged derivatives, complex financial products that councils are not permitted to purchase. The precedent for this was set in the court case against Hammersmith and Fulham in 1992.
Examples
Housing associations
Up to 30 housing associations have bought up to a total of £1.25 billion of LOBOs.