Brokers are demanding changes to the practice of lenders leaving ‘hard footprints’ while credit checking their clients for a decision-in-principle (DIP) during a mortgage application, claiming it goes against the Financial Services Authority’s (FSA) stated desire for borrowers to be able to shop around for the best mortgage deal.
Currently when a DIP is made, the majority of lenders carry out a credit check and leave a hard footprint on a borrower’s credit record, which can be seen by other financial providers. If the customer decides not to proceed with the mortgage, the hard footprint remains. Brokers say this could be detrimental to the client’s credit rating as many lenders view multiple hard footprints as the sign of a ‘credit hungry’ customer, possibly indicating that they have been previously turned down for a home loan.
A second type of footprint, known as a ‘soft footprint’, is used by lenders if they want to credit check a customer in order to produce a detailed price quotation for a mortgage. Other lenders can also see these soft footprints, but as they only reflect a quotation rather than an actual mortgage application, they are viewed very differently to hard footprints.
However many brokers say they often need to provide a DIP, or an agreement-in-principle (AIP), for their clients on more than one mortgage so they can compare deals using accurate figures for the cost of the deal and a confirmation of how much the provider is willing to lend. They are now calling for soft footprints to be used at DIP stage, a campaign that has won the backing of the Association of Mortgage Intermediaries (AMI).
A confusing issue
The issue is made all the more confusing because advice from the FSA, echoed by the Council of Mortgage Lenders (CML) and credit ratings agencies, seems to be at odds with the regulators own guidelines that lenders should ensure consumers can shop around freely by not leaving hard footprints on their credit records.
Currently the Frequently Asked Questions (FAQs) relating to MCOB on the FSA website seem to be giving conflicting messages to lenders. Under the section about Key Facts Illustrations (KFIs), the FSA states: ‘When a firm decides to get a DIP for a consumer, and this involves a credit check, we look to firms to act in a way that overcomes any difficulties that repeated credit reference searches might pose to consumers shopping around.’
The FAQ then goes on to suggest that organisations consult best practice guidelines on credit searches posted on a linked website for credit checking agency Experian. Regarding the guidelines, the FAQ says: ‘These require firms to make it clear to the consumer from the outset that they are processing an application for credit and will carry out a full credit search. This will place a credit application footprint on the consumer’s credit file because they are seeking a commitment from the lender to lend.’
The bottom line then is that a DIP will result in a hard footprint, so if consumers want to shop around brokers should not request a DIP because multiple hard footprints could adversely impact their credit score for their full application.
This is reinforced by the FSA’s FAQs, which state: ‘(The guidelines) also provide that a firm must not credit check a consumer if the consumer only wants an indication of likely cost in the form of a quotation on a standard priced product. In other words, a firm must only undertake a credit check where the consumer wants a formal undertaking from the lender that they will lend.”
Broker Danny Lovey, of The Mortgage Practitioner in Basildon, has taken up the issue directly with the FSA, pointing out the potential problems to consumers and outlining the anomalies in its current guidance. He says that privately the regulator understands there is confusion surrounding the issue. Lovey believes the FSA and lenders need to provide urgent clarification over the practice of footprints and eventually release updated guidelines.
“At the moment this whole situation is a mess,” Lovey says. “The FSA is saying one thing – that consumers should be able to shop around – but because of its own rules, lenders are doing something else.”
Lovey admits that it is not always necessary to carry out more than one DIP, and says: “If I’ve done my job properly then I will have narrowed my choice down to one mortgage product anyway, so I only need to carry out one DIP. But it would be nice to get DIPs from a couple of lenders, particularly for more complex cases, without leaving hard footprints everywhere. It certainly cuts down on your options.”
Exacerbating the situation
Lovey also says that leaving unnecessary hard footprints at DIP stage could also exacerbate a situation if a client had previously been checked when applying for other credit facilities. He explains: “Clients don’t understand about footprints so they don’t know how many they have left when they have applied for different credit cards, for example, particularly those that are thought of as credit card ‘rate tarts’.
“Their financial situation might actually be perfectly good, but because they have been moving around between credit cards they have left lots of hard footprints. So if I apply for a DIP and leave a hard footprint, all of a sudden they may get turned down for a mortgage.”
Lovey says the only lenders he is aware of that use soft footprints at the DIP stage are those in the HBoS Group, and adds that BM Solutions goes as far as giving the broker the option to select either hard or soft footprints when requesting a DIP.
BM Solution’s approach could well be because of its interpretation of the FSA’s advice relating to risk-based pricing of mortgages. The FSA’s FAQ states: “If the terms of a product depend wholly or partly on the consumer’s credit reference data, a firm may need to undertake a credit check to give the consumer an illustration of cost. To enable firms to provide quotations on such ‘risk-based pricing’ products, the best practice guidelines state that firms should use an ‘enquiry search’ or ‘quotation search’. These register a different type of footprint on the consumer’s record (sometimes called a ‘soft’ footprint).”
Lovey continues: “What we need first of all is some clarity. Lenders should make it clear whether they apply hard or soft footprints at the DIP stage. Then there needs to be an industry agreement, with all parties getting around the table and hammering out an agreement on the way it should be that best supports mortgage borrowers.”
Broker uncertainty
Rod Murdison, proprietor of brokerage Murdison and Browning, believes many intermediaries are unsure of the ramifications of the different footprints. He explains: “In the old days, a broker would be concerned about just how many credit checks would appear on a client’s record, particularly if the client had applied for a loan themselves. But now there are soft footprints and hard footprints, there is a lot of confusion surrounding when they are used and what that actually means to the consumer.”
Murdison also agrees that being able to get more than one DIP is an important option for mortgage brokers, particularly for complex cases. He points out that often borrowers cannot remember all the credit facilities they may have applied for or the full extent of CCJs that have been lodged against them in the past. In these cases, the only way of getting an accurate picture of what mortgages are available to a borrower, Murdison says a DIP is vital. Yet if the client is turned down at the DIP stage because of their credit rating, the fact that they now have an additional hard footprint on their record could be detrimental when searching for alternative lender.
“Brokers tend to request DIPs these days, so to preclude that from happening due to concerns over hard footprints would be a real mistake,” Murdison says. “To suggest that all borrowers get ‘quotations’ these days sounds absurd. People want a definite information of what they can borrow and how much it will cost.”
Murdison’s concern over the confusion about when footprints are actually used is borne out by research undertaken among intermediaries by AMI. The survey found that 85 per cent of brokers use a lender’s website to obtain a DIP/AIP, with 69 per cent saying they obtain a DIP ‘in all cases’ or ‘most cases’. Yet the research also revealed 43 per cent of brokers said lender websites never make it clear which type of footprint would be left on a client’s credit record, whereas 32 per cent said this information was only made clear on lender websites ‘some of the time’.
AMI says that this lack of clarity means brokers cannot advise their clients as to the impact of carrying out a DIP or what their options are. Rob Griffiths, AMI’s associate director, explains: “Often brokers are not aware that a footprint is being left at the DIP stage, so we need clarity from the lenders as to what kind of footprint is being left and at what stage of the process.”
AMI has produced a factsheet for its members that spells out the difference between the two different kinds of footprints, the impact they have on a client’s credit record and what circumstances they are currently likely to be used.
In particular the factsheet tries to address the concern that many brokers have that having produced a quote for a client, they may only uncover credit problems when making a full application. The AMI factsheet says: ‘There is a risk of that, but it has to be balanced against the risk that by undertaking a search, you could adversely affect a customer’s chance to get a loan or the best terms for a loan.’
Urging lender action
Griffiths believes the FSA’s current FAQs on its website relating to credit searches and footprints need updating. He says that AMI is urging lenders to use soft footprints for DIPs, switching to a hard footprint only when a full application is being made. “If a broker is just sourcing various options for a client, then customer choice is being hindered if a hard footprint is left at the DIP stage,” he says. “Brokers want to be able to provide clients with a list of products that they can easily compare. But they can’t do this if a hard footprint is likely to be left which can affect the client’s credit rating.”
According to information on the Experian website, which can be reached from the FSA’s FAQ section on credit searches, the issue of has been discussed at a meeting hosted by the CML committee of top 10 mortgage lenders, attended by the FSA and the three consumer credit reference companies, although the date of this meeting is not given.
The website says the subject of multiple searches registered for consumers ‘shopping around’ for credit was discussed and a new guidance note was agreed ‘as a reflection of the discussion and to provide the basis for the way forward for resolution of this matter across all products in a consistent manner across all three agencies and all regulators’.
Yet the guidance note only adds to the confusion by stating: ‘In the mortgage market, it is quite common for consumers to seek confirmation that they have a mortgage agreed when they are shopping around for a property. The credit reference agencies consider this to be an application, because it indicates a commitment to lend. However, mortgage lenders should note that there is a difference between what the credit reference agencies and the Financial Services Authority (FSA) consider to be applications. For the purposes of the FSA regulations articulated in PS 186, such transactions are not generally considered to be an application.’
The note’s concluding paragraph says: ‘In order to preserve the power of the search footprint as a predictive characteristic, lenders need to ensure that application searches are only registered when there is a genuine application. That will necessitate an examination of the processes and systems in order to be confident that searches of the correct type are conducted at the correct point on the process.’ This seems to put the onus on lenders to determine whether or not the DIP is purely for quotation purposes or whether it is for a full application.
Then the note continues: ‘Credit application searches should only be carried out where an application is being made to the lender. Quotation searches should only be carried out where the lender uses risk-based pricing and/or cannot provide a quotation without carrying out such a search.’ In this sense, the note seems to be suggesting that soft footprints should only be used in DIPs where there is uncertainty over whether the application would be successful without a thorough credit check.
Caution
Publicly the regulator says that although the use of credit searches and footprints will have an impact on how its own rules are implemented, it is not responsible for which footprints are used and when. In a written response to Mortgage Introducer, the FSA said: “While we don’t regulate credit reference agencies, or the use made of them by firms, we have an interest in ensuring that consumers are able to shop around. We have therefore published an FAQ making clear our expectation that firms will avoid the unnecessary creation of ‘hard’ footprints that may limit a consumer's ability to shop around. The FAQ refers firms to, and quotes from, industry best practice guidance on credit searches.
“We are conscious of market developments which make it increasingly likely that consumers (or intermediaries acting on their behalf) may seek a decision or approval-in-principle well before deciding to formally apply for a particular mortgage. We are interested in exploring with firms the effect of these changes, and discussions are planned with the industry bodies and the credit reference agencies. It may be that as a result of these discussions we will want to supplement or update the existing website FAQ.”
Clearly, the guidance offered by the various parties to both mortgage lenders and intermediaries is far from clear. But until all parties reach an agreement, confusion will continue to reign and intermediaries should DIP with caution.
