Spotlight on Newham Council over high interest ‘LOBO’ loans

Newham has a reported £563 million of high interest bank loans. Picture: Dominic Lipinski/PA Wire

Newham has a reported £563 million of high interest bank loans. Picture: Dominic Lipinski/PA Wire - Credit: PA Wire/Press Association Images

A parliamentary committee chairman has called for a national inquiry into £15 billion worth of high interest bank loans taken out by more than 200 local authorities, with the spotlight turning on Newham.

The council is said to have the biggest portfolio of so-called “LOBO” (Lender Option Borrower Option) loans totalling £563 million, leaving it paying back rates of up to 7.6 per cent on these loans this year.

The revelation comes as Newham is forced to find an additional £50 million in savings next year under the Conservative government’s plans to cut an added £12 billion in public spending nationwide.

Speaking to Channel 4’s Dispatches investigation team, Clive Betts, Chairman of the Communities and Local Government Select Committee, which scrutinises local government, said he wanted the committee to investigate the loans situation.

“I think the committee will want to look at this very seriously indeed,” Mr Betts said, adding he would question “whether these loans should be continued” and if there was any way they could be “unravelled and councils given loans at a fair interest rate”.

Although there are a number different types of LOBO loans, they generally assume the same format and are brokered through big city banks.

Contracts can run for between 40 and 70 years with councils forced to pay “huge” exit fees if they want to move to a better deal, while the banks are able to raise the loan’s rates at regular intervals.

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The most expensive loan for councils is known as the “inverse floater”. These have interest payments “tied to a complex formula designed to reduce the interest payments if rates go up”, the news programme is set to reveal tonight.

A spokeswoman for Newham Council confirmed it had a “diverse range” LOBO loans, but added that less than a third of these were of the “inverse floater” variety.

She added that although the bank could raise rates, “it isn’t that we would be forced to [pay the new rates]. If the bank wants to increase it, we have the ability to say we don’t want to and we would just pay back the loan [as it was] and move on”.

The council also stressed the importance of looking at the life of the loan, many of which were taken out within the last decade, adding that when the “whole length of the loan” is considered the council is “going to be better off”.

The spokeswoman said: “Newham Council’s prudent borrowing decisions have resulted in the council making £65million of savings on our borrowing portfolio since 2002. Like all local authorities we borrow money to make capital investments.

“Borrowing commitments are made by the council on the grounds that they are prudent, affordable and sustainable and protect the council from changes in interest rates.”

She added: “Between 2002 and 2009 the council refinanced its debts to take advantage of lower interest rates available through a series of Lender Option Borrower Option loans from banks.

“Previously the council was paying in excess of 10pc on its loans with the Public Works Loans Board, which lends government money to councils. After refinancing, the council’s interest repayments were halved.”

Dispatches: How Councils Blow Your Millions airs tonight at 8pm on Channel 4.