Responsible Lending and Interest only
The affordability assessment
A lender must verify income and be able to demonstrate that the mortgage is affordable taking into account that figure for income and, as a minimum, the borrower’s committed expenditure (which includes the mortgage payments) and essential household expenditure.
The interest rate stress test
The lender must also take account of the impact on mortgage payments of market expectations of future interest rate increases.
The interest-only proposals
The lender must also assess affordability on a capital and interest basis, unless there is a clearly understood and believable alternative source of capital repayment.
Repayment strategies
A lender may not accept speculative repayment strategies, such as reliance on increased property prices.
Lending beyond state pension age
The lender should adopt a prudent and proportionate approach to assessing income where the mortgage term extends beyond the state pension age of the applicant.
Debt consolidation for credit impaired consumers
For credit impaired consumers who are consolidating debts the lender will be required to either assume that the debts will remain outstanding by including them as ‘committed expenditure’ or repay the debts directly to the creditor.
Transitional arrangements
We will allow lenders to waive the affordability rules when entering a new mortgage contract - providing the borrower has a good repayment history. These arrangements do not compel the lender to lend, ultimately that is a commercial decision for the firm.
Distribution and Disclosure
Affordability
We have removed the requirement for intermediaries to assess affordability. Intermediaries will only be required to determine whether the consumer meets the lender’s expected eligibility criteria.
Advice
We are removing the non-advised sales process and requiring all sales which involve spoken or other interactive dialogue with the consumer to be advised.
Execution only
Knowledgeable consumers such as High Net Worth individuals and professional consumers can opt-out of receiving advice and purchase on an execution-only basis.
Vulnerable consumers
Vulnerable consumers (i.e. equity release, sale and rent back, right to buy and those who are consolidating debt) will not be allowed to opt-out of advice. However, with the exception of sale and rent back consumers, they can reject the advice and proceed to purchase on execution-only basis.
Non-interactive sales
With the exception of those we have categorised as vulnerable, where there is no spoken or other interactive dialogue in the sale (e.g. purely online and postal sales) consumers will be able to purchase on an execution-only basis.
Consumer information
We have reduced our prescribed disclosure requirement for firms in order to reduce information overload for consumers. Instead we have re-focused our requirements so that key messages are brought to the consumer’s attention at the right time and in a way that they are most likely to be receptive to.
Direct only deals
We are making it easier for intermediaries to recommend a direct only deal by removing the requirement to provide a Key Facts Illustration (KFI) for those deals.
Arrears and Repossessions
Arrears charges
We have strengthened our existing rules on arrears charges to address areas of poor practice and significant abuses found in arrears handling practices, for example changing guidance in rules on administration costs, or limiting the number of payments lenders can collect to two direct debits a month.
Non deposit taking lenders (Non-banks)
Prudential requirements
We are introducing capital requirements to reflect the risks in non-bank lending. This includes requiring:
• non-bank lenders adopt a more risk-based regime;
• the quality of capital is increased; and
• firms to put in place systems and controls to manage their liquidity risk effectively.
Niche Markets
The niche sectors of the market consists of equity release (lifetime mortgages and home reversion plans), home purchase plans, sale and rent back, bridging finance, high net worth lending and business lending.
The FSA wants to achieve the same broad outcomes for niche consumers as for conventional mortgage consumers so is proposing a straight ‘read across’ of the majority of its proposals, affordability checks, income verification, etc.
Summary of amendments since previous consultations
Proposals unchanged since previous consultations
Responsible lending
• Lender responsible for affordability checks
• Income to be verified in all cases
• Expenditure to be assessed in all cases
• Stress testing against future interest rate increases
Distribution and disclosure
• Removing requirement on intermediaries to assess affordability
• Requiring every seller to hold a relevant mortgage qualification
• Replacing the Initial Disclosure Document (IDD) with a requirement for firms to disclose ‘key messages’ to the consumer
• Changing the ‘trigger points’ for presentation of the KFI to reduce information overload for consumers
• Removing the requirement for ‘independent’ firms to offer their customers a ‘fee only’ option
• Requiring ‘independent’ firms to disclose to their customer whether they are sourcing direct-only deals
• Requiring firms to consider appropriateness of rolling fees into a loan
• Requiring consumers to positively elect to roll fees into the loan
Arrears charging practices
• Limiting the number of times fees for missed payments can be charged
• Widening the arrears charges and forbearance rules to cover all payment shortfalls
• Clarifying what costs can and cannot be recovered through arrears charges
Proposals amended since previous consultations
Responsible lending
• Details of expenditure assessments
• Details of stress test against possible increases in interest rates
• Assessing affordability assuming capital and repayment basis in all cases – now will allow interest-only as long as there is a credible repayment strategy as per interest-only policy
Distribution & Disclosure
• Requiring sellers to assess appropriateness across all sales – now requiring advice to be given whenever there is spoken or other interaction
• Explanation of scope of service – now must inform the consumer of any limitations to their service
• Requiring sellers to assess if appropriate for consumer to take further advance rather than remortgage – now just need to inform consumer that a further advance may be available
Proposals consulted on and not proceeding with
Responsible Lending
• Assessing affordability over a maximum 25 year term
• Requiring firms to apply an affordability buffer for credit-impaired consumers
Distribution & Disclosure
• Replacing scope of service labels with the RDR approach of ‘independent’ and ‘restricted’
• Requiring firms to provide two KFIs where the borrower is considering rolling fees into the loan
• Requiring sellers to assess if appropriate for the loan to extend into retirement
Proposals not yet consulted on
• Interest-only
• Arrears - removal of rule that permits removal of concessionary rates if consumer has a payment shortfall
• Prudential regime for non-banks
• Read across to niche markets
• Transitional arrangements
