The regulator found weaknesses in responsible lending practices and in firms’ assessments of a consumer’s ability to afford a mortgage. As a result the regulator has started enforcement action against five firms.
The thematic work reviewed 11 lender firms, representing more than 50 per cent of the non-conforming market by volume of sales. It also included 34 intermediary firms covering 485 customer files, of which 90 were tracked from the contact made with an intermediary through to the lender's decision.
While the research found no significant evidence of non-conforming mortgages being sold incorrectly to prime customers, several other issues were identified for both intermediaries and lenders when selling to non-conforming customers.
For intermediaries:
- In a third of the files reviewed there was an inadequate assessment of consumers' ability to afford the mortgage.
- In almost half of the files there was an inadequate assessment of customers' suitability (e.g. needs and circumstances) for the mortgage.
- In over half of the files customers had self-certified their income but it was not clear in many cases why they had been advised to do this.
- Significant numbers of consumers were advised to re-mortgage, thereby incurring early repayment charges, without the adviser being able to demonstrate that this was beneficial to the customer.
- None of the lenders adequately covered all relevant responsible lending considerations in their policies. For example, some firms’ lending policies contained unclear affordability or self-certification requirements.
- In many cases, lenders did not apply their own policies in practice. For example, some firms failed to check the plausibility of information, as required by their own lending policy.
- There were also failings by lenders to monitor the application of their policies, which resulted in the approval of potentially unaffordable mortgages.
Clive Briault, managing director of retail markets at the FSA, said: "We are very concerned about these findings. Consumers in the non-conforming market are vulnerable people who may have high debts or a bad credit history. It is therefore important that they are properly assessed and advised. We will not hesitate to take action where we find bad practice.
"Poor sales practices in this market may lead to serious wider consequences. The high level of non-conforming arrears in a benign market raises some important questions about the consideration given to affordability by lenders and intermediaries when undertaking this business. All mortgage firms must ensure they are treating their customers fairly by undertaking robust assessments of affordability and ensuring they have sound, and consistently applied, lending policies.
"Consumers should make sure they understand the risks, costs and charges when taking out a non-conforming mortgage, particularly at a time when interest rates are rising. They should also not be tempted to inflate their salary, which is a criminal offence."
The FSA will continue to monitor firms operating in the non-conforming market and will continue its focus on debt and affordability for the latter half of 2007. This will include specific work on self-certification.
The FSA is also publishing on its website further mortgage thematic findings:
Mortgages into retirement
More than a quarter of 22 lenders failed to comply completely with responsible lending requirements, and several indicated that they were unclear what was required of them. The FSA will be publishing a good and poor practices guide on its web-site. Firms are expected to read the guide, consider whether their policies comply and if not make appropriate changes.
Interest-only mortgages
The project reviewed the approach to interest-only lending by 11 non-conforming and nine prime mortgage providers. The review specifically looked at how lenders take account of consumers' repayment strategies for interest-only loans. The FSA concluded that many firms need to do more to ensure that their responsible lending policy provides a clear basis against which they can consider the plausibility of a borrower's repayment strategy. The FSA has published some good practice examples on the website to illustrate our findings.
