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FSA propose new mortgage rules?
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July 13,2010
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The Financial Services Authority (FSA) has today outlined proposals to ensure all mortgages are carefully assessed to make sure borrowers can afford them.
Reflecting the FSA's enhanced consumer protection strategy and intensive day-to-day supervision, the proposed changes aim to ensure all lenders get back to the basics of responsible lending and that problems are prevented before they can develop or get out of control.
Some of the key proposals include:
- Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer's ability to pay;
- Requiring verification of borrowers' income in every case to prevent over inflation of income and to prevent mortgage fraud;
- Extra protection for vulnerable customers with a credit-impaired history.
The tough new proposals, published in the consultation paper, form part of a major review by the FSA into the UK mortgage market and are based on detailed analysis of past lending decisions, looking at the causes of arrears and repossessions since 2005.
The FSA found that:
- 46% of households either had no money left, or had a shortfall after mortgage payments and living costs were deducted from their income;
- Almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income;
- The share of interest-only mortgages has been increasing. At the peak of the market, over 30% of all mortgages were interest-only;
- Many consumers with no repayment vehicle count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all;
- Borrowers with a credit-impaired history are particularly vulnerable.
Lesley Titcomb, FSA director responsible for the mortgage market, said:
“There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.
“While it is clear the mortgage market has worked well for many, we need to build a strong new framework to protect mortgage customers and to ensure that the problems we have seen in the past do not happen again, particularly as the mortgage market recovers.”
Today's report also includes the key findings from the FSA's review into arrears charges, which indicated significant variation in the level of arrears fees across the market.
The mortgage rules require arrears charges to be based on a reasonable estimate of the cost of the additional administration required as a result of the customer being in arrears.
The FSA is actively seeking views from consumer groups and industry and invites responses by 16 November 2010.
Payplan, the free debt advice provider, has welcomed the FSA's latest changes to the way lenders should treat customers in arrears, particularly the requirement for lenders to consider all options for borrowers before taking action for possession of the property.
According to Managing Director, John Fairhurst, most Payplan clients with mortgage arrears also have a range of unsecured debts (typically of around £40,000).
He said:
“In our experience, mortgage arrears need to be dealt within the context of the overall financial situation that the customer finds himself.
"In trials where we are working with a small number of mortgage lenders to talk to their clients who are in arrears, we have found that by engaging the customer about the totality of their debt situation we are nearly always better able to effect a solution that stabilises and makes the client's repayments on his unsecured debt more manageable, leaving a greater proportion of available income to put towards improving the mortgage arrears situation.
“Without having to run the risk of giving advice, lenders adopting a more holistic approach to their customers' arrears problems, can turn the FSA's new rules to their own advantage put more customers back on the straight and narrow and fulfil their obligations under TCF.
"Rather than being an extra burden, lenders should see the FSA's requirements to consider all options for clients in debt as an opportunity to help tackle underlying unsecured debt liabilities at source and thereby free up more disposable income for repayment of mortgage arrears.”
CML director general Michael Coogan said:
"There will always be a regulatory trade-off between protecting consumers from over-borrowing, and increasing the barriers to home-ownership. The mortgage market for the time being has already corrected, to a degree that the main consumer concern right now is about access to finance, not about risky lending.
"The risk is that the gain will not match the pain in the short term. The industry and consumers will feel the costs of imposing new regulatory requirements now, in a market where they are not needed, but the potential consumer benefits will only be felt at some unspecified time in the future.
"We look forward to working with the FSA to ensure that a pragmatic approach to implementation can be adopted as far as possible, to reduce the negative side-effects that may arise from well-intentioned regulation.
"There is also a need to manage the regulatory burden that may emerge if the UK proceeds with changes just at the time that the European Commission is also due to publish proposals on the same aspects of mortgage regulation."
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