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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 1, 1997
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CITYSCAPE FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 0-27314 11-2994671
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State or Other Jurisdiction Commission (IRS Employer
of Incorporation File Number Identification No.)
565 Taxter Road, Elmsford, New York 10523-5200
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(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (914) 592-6677
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Former name or former address,
if changed since last report
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Item 5. Other Events.
On December 1, 1997, Cityscape Financial Corp. (Nasdaq: CTYS) (the
"Company") received from the Director General of Fair Trading from the United
Kingdom's Office of Fair trading (the "OFT") "Non-Status Lending Guidelines for
Lenders and Brokers Revised November 1997" (the "Revised Non-Status
Guidelines") that are applicable to mortgage lenders like City Mortgage
Corporation Limited, the Company's indirect wholly-owned subsidiary in the
United Kingdom, that focus on lending to individuals who are unable or
unwilling to obtain mortgage financing from conventional mortgage sources. The
Revised Non-Status Guidelines revise the guidelines issued by the OFT in July
1997 (the "July Non-Status Guidelines"). In addition, on December 2, 1997, the
Company received a letter from the OFT (the "OFT Letter") expressing the OFT's
views on the Company's compliance with the Unfair Terms in Consumer Contracts
Regulations 1994 (the "Consumer Contracts Regulations") with respect to loans
originated by the Company prior to August 1997.
Background
The Company's UK mortgage lending business is subject to regulations
promulgated under the United Kingdom Consumer Credit Act 1974 (the "CCA")
applicable to loans ("regulated loans") made to individuals or partnerships with
principal balances of pound sterling 15,000 or less (loans with principal
balances in excess of pound sterling 15,000 are not regulated under the CCA).
The Director General of the OFT has the responsibility under the CCA for the
granting of consumer credit licenses to mortgage lenders and for subsequent
monitoring of their activities to ensure continued fitness to hold such
licenses. In March 1997, the Company received a letter from the OFT stating
that, when determining the fitness of licensees, the OFT will consider whether
the licensee or its associates have engaged in business practices which appear
to be inappropriate, regardless of their legality. The Company believes the
letter was also sent to other lenders, as well as intermediaries and other
entities involved directly or indirectly in the non-status lending market. The
letter specifically sets forth certain practices deemed by the OFT to fall
within such categories, including the appropriateness of standard/concessionary
rate structures, as well as the calculation of prepayments using the Rule of 78s
method. Following receipt of the letter, the Company commenced a review and
evaluation of its practices with respect to each issue raised in the letter and
entered into discussions with the OFT regarding its concerns raised in the
letter.
The July Non-Status Guidelines highlighted some of the main practices that
the OFT considered to be inappropriate, whether or not lawful. The OFT stated
that if lenders and/or brokers continue these practices, the OFT will take
regulatory action against them. The majority of these practices were either (i)
not applicable to the Company's UK operations or (ii) practices in which the
Company believed itself to be in compliance or easily able to modify its
operations in order to comply with the July Non-Status Guidelines. In the July
Non-Status Guidelines, however, the OFT announced that (i) dual interest rates
structures involving a large differential between the two interest rates are
inappropriate and should be discontinued and (ii) the Rule of 78s method of
calculating prepayments is inappropriate in the non-
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status lending market, should be discontinued at the earliest opportunity and
should not be applied to existing loan agreements without some form of cap to
ensure payments were not excessive. Furthermore, the July Non-Status Guidelines
stressed that lenders who wish to recoup administrative costs associated with
defaults should do so in accordance with a published scale of charges and with
respect to prepayments, charges for early redemption should do no more than
cover the lender's unrecovered administrative and other costs incurred to the
date of prepayment.
The Company has eliminated the concessionary/standard rate in its new loan
programs and replaced it with a single rate. The average single rate that the
Company charges is higher than the average concessionary rate and lower than the
average standard rate that the Company had charged previously. Since August
1997, the Company discontinued originating loans that calculate prepayments
using the Rule of 78s method. The Company is calculating prepayments using
alternative methods in accordance with the July Non-Status Guidelines.
During the first half of 1997, the Company commenced broadening its UK
product offerings with products that calculate prepayments without using the
Rule of 78s. The elimination of the concessionary/standard rate structure and
Rule of 78s method has had a negative impact on profit margins for the Company's
UK loans which could have a material adverse effect in future periods on the
Company's results of operations and financial condition, especially if the
Company is unsuccessful in its product-broadening efforts.
The Company has been in discussions with the OFT regarding the effect of
the July Non-Status Guidelines on the Company's UK loans that were originated
prior to the issuance of such guidelines.
Revised Non-Status Guidelines and OFT Letter
In the Revised Non-Status Guidelines, the OFT announced revisions to the
July Non-Status Guidelines, some of which affect a significant portion of the
Company's loans that were originated prior to the issuance of such guidelines.
With respect to loans that provide for dual interest rates, it is the OFT's
belief that dual interest rate structures (i) may be unenforceable through the
courts where the sum payable from the higher rate exceeds a genuine estimate of
the lender's loss arising from a breach of the borrower's contractual duty and
(ii) in substance provide for payment of compensation upon a breach of an
obligation and may be challenged under the Consumer Contracts Regulations as
unfair and non-binding on the borrower if such compensation is
disproportionately high.
With respect to unregulated loans that provide for the Rule of 78s method
for calculating prepayments (regulations currently promulgated under the CCA
specify the use of Rule of 78s for calculating prepayments for regulated
loans), it is the OFT's belief that such calculation similarly may result in a
borrower paying a
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disproportionately high sum to redeem a mortgage and may be challenged under the
Consumer Contracts Regulations as being unfair and therefore non-binding on the
borrower.
The Consumer Contracts Regulations set forth various terms which are
considered unfair in consumer contracts and therefore can be challenged as
unenforceable against the consumer. In the Revised Non-Status Guidelines, the
OFT has stated that it believes dual interest rate structures and Rule of 78s
calculations are two such unfair terms. The Company believes that the
standard/concessionary rate and Rule of 78 provisions in its existing loans are
fair and enforceable; however, no assurance can be given in this regard due to
the fact that courts in the UK have not yet decided the issue. Furthermore, even
if UK courts were to find these provisions enforceable, there can be no
assurance that the Company would be able to continue to enforce these provisions
of its loan contracts due to the OFT's view of such provisions and the OFT's
ability to revoke the Company's consumer credit license in the UK if it believes
the Company's practices are unfair despite their legality. Moreover, in the OFT
Letter, the OFT has requested assurances from the Company, on or before December
16, 1997, that it will discontinue with respect to its existing loans the use of
certain contract terms, including the Rule of 78s for unregulated loans and the
standard/concessionary rate structure and the OFT has stated that, in the
absence of receipt of suitable assurances, it will seek an injunction intended
to restrain the Company from using such terms.
Although the Company is still in the process of evaluating the Revised
Non-Status Guidelines and the OFT Letter and cannot at this time quantify their
impact, the Company (i) does not believe that the $15 million valuation
allowance that was taken in the second quarter of 1997 to increase reserves
related to recorded mortgage servicing receivables will be sufficient to offset
any negative impact that the Revised Non-Status Guidelines and the OFT Letter
may have on the carrying value of the Company's recorded mortgage servicing
receivables and (ii) anticipates that, as a result of such guidelines and
letter, the value of the Company's mortgage servicing receivables in the UK
will be materially impaired which will have a material adverse effect on the
Company's operating results for the fourth quarter of 1997 and the Company's
financial condition.
Cityscape Financial Corp. is a consumer finance company that, through
its wholly-owned subsidiaries, Cityscape Corp. and City Mortgage Corporation
Limited, is engaged in the business of originating, purchasing, selling and
servicing mortgage loans in the United States and the United Kingdom, secured
primarily by one- to four-family residences.
Cityscape was founded in 1985 and is headquartered in Elmsford, New
York with regional processing offices in California, Georgia, Illinois and
Virginia.
This report on Form 8-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors including, but not limited to, risks related to
operations in the UK, liquidity and negative cash flows, uncertainty as to
availability of funding sources, dependence on securitizations, potential
changes in valuations of interest-only and residual certificates and mortgage
servicing receivables, risks of adverse economic conditions, risks related to
recent expansion and product extension, competition, and other risks detailed
from time to time in the Company's SEC reports. The Company undertakes no
obligation to release publicly any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of anticipated or unanticipated events.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report on Form 8-K to be signed on its
behalf by the undersigned hereunto duly authorized.
CITYSCAPE FINANCIAL CORP.
(Registrant)
By: /s/ Robert C. Patent
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Name: Robert C. Patent
Title: Executive Vice President
Dated: December 5, 1997
