The Financial Services Authority (FSA) last week confirmed it was reviewing its stance on credit referencing and footprints in the mortgage lending industry. The regulator said it was waiting on the outcome of a series of meetings to be held between the Council of Mortgage Lenders (CML) and its stakeholders before deciding whether any changes to its current guidelines are necessary.
The issue of ‘hard’ and ‘soft’ footprints refuses to go away, but it seems the changes in the way banks and building societies make lending decisions has prompted the current review.
Although the CML has confirmed the issue of footprints is back on its agenda, it said that no formal meetings are taking place. However, the trade body has cited intermediary concerns regarding the move towards affordability based lending as one of the main reasons for discussion.
Commenting, Sue Anderson, head of external affairs at the CML, stressed that while the issue of footprints and client credit records is more of a theoretical, rather than practical, problem, the trade body is looking at whether the different affordability methods used by lenders could potentially cause problems further down the line.
She says: “The reason the issue of footprints is on the radar again is that affordability based lending means it is often more difficult for a broker to know if their client will or will not fit the lender’s criteria. In many cases, the broker is not privy to the decision-making process behind lenders’ affordability models.
She continues: “While this means they would obviously avoid putting forward any cases that would get declined at the decision-in-principle (DIP) stage, if the model used is not transparent or clear in how these calculations are reached, then we need to look at any issues that may arise.”
Causing confusion
The move towards affordability based lending has been welcomed in the market as it has allowed the mortgage market to move forward and helped more first-time buyers get onto the property ladder.
However, the variety of models used by lenders is causing some confusion. There are also concerns that while using affordability calculators gives an indication of the amount of money a lender is willing to offer, it doesn’t constitute a done deal. This means, to get an accurate lending decision, a DIP must be done, which is where the problem lies, says Ray Boulger, senior technical adviser at mortgage brokerage John Charcol.
He says: “Affordability calculators offer an indication of what the client can get, but it is not a decision to lend. If a client is keen to know exactly how much they can borrow, then the only way a broker can find out for sure is by doing a DIP. This may mean carrying out two or three DIPs with a number of different lenders – which may result in a ‘hard’ footprint and affect the client’s credit rating in the future. But unless you can present the client with all the options, then the adviser is not doing his job properly or giving them the advice they require.”
Boulger adds that the different methods used by lenders when making an affordability decision will only add to the furore. “The problem will only get worse as the industry moves towards affordability based lending as the models vary so widely and there is no definitive lending decision until a DIP is submitted.”
Alan Lakey, partner at Highclere Financial Services, agrees. He says while affordability based lending is opening up the market, it is also leading to increased confusion and blurred boundaries in the sector.
He says: “In the good old days when income multiples were used, it was very clear cut exactly how much a client could borrow. However, while affordability calculations are most definitely required in order to move the industry forward, there are no set industry standards – all lenders calculate affordability in very different ways.
“The varying models that lenders use are worrying from my point of view, as I always need the criteria before making a final decision.”
A vicious circle
Alliance & Leicester (A&L) is one of the handful of lenders that have gone down the affordability based route. Its head of intermediary mortgages, Mehrdad Yousefi, says while he understands the reasons why both footprints and affordability calculation models are two intermediary concerns, he does not understand why the two are linked.
He says: “Even when brokers had the clarity of income multiples as a basis to calculate how much a lender would offer, a DIP still had to be submitted before a decision to lend was agreed. This is no different to affordability calculators – it is just a different way of working out the amount that can be borrowed.”
Yousefi adds that any concerns about a client being declined at a DIP stage are unfounded if the intermediary has entered all the relevant and correct criteria.
“If the information entered into the affordability calculator is no different to what is later submitted on a DIP, then there is no reason why the client should be declined. Also, while the decision may be different, it may not be negative – it may be that they can borrow 10 per cent more than was previously calculated. It is important that brokers do not underestimate the intense competition in the market – lenders are not going to turn away business willy nilly.”
It seems the affordability footprint issue is a bit of a vicious circle. With no set industry standard in place, intermediaries remain blind to many of the affordability methods used by lenders to calculate loan amounts, and are therefore concerned about the impact it may have on a client’s credit rating. Exactly what the outcome will be remains to be seen.
