Responsible Lending

These are the key proposals in the FSA’s consultation paper CP11/31 that was released in December 2011 relating responsible lending:

Affordability assessments

The FSA propose that before entering into a regulated mortgage contract or making a further advance, a lender must assess whether the consumer will be able to repay the sums advanced and be able to demonstrate that the mortgage is affordable for the consumer. This involves the following:

• Income verification – the FSA clarifies that it sees it as the lenders ultimate responsibility to assess affordability. They propose that the lender is also responsible for obtaining evidence of income to support all mortgage applications.
• Assessing expenditure – when considering if a mortgage is affordable, a lender should take into account the committed expenditure of the applicant(s) and as a minimum, the basic expenditure of the applicant(s) household. The lender should also consider the basic quality of living costs that are hard to reduce, e.g. household goods and services, childcare and basic recreation.

Taking account of interest rate increases

• The FSA propose that, when considering if a mortgage is affordable, a lender should ‘stress test’ the mortgage payments against potential interest rate increases.

Interest-only mortgages – FSA Proposals

• As a general rule, all mortgages should be assessed on a capital and interest basis.
• Lenders may assess affordability on an interest-only basis where the consumer has a clear repayment strategy for repaying the capital.
• Where the repayment strategy requires the consumer to make regular payments from income (e.g. paying into an investment policy), lenders must ensure this is taken into account as committed expenditure when assessing affordability.
• Repayment strategies need to be credible, purely speculative strategies (e.g. reliance on house price increases) should not be accepted.
• Lenders must operate within a clearly defined, Board approved interest-only policy. Lenders should set appropriate controls relevant to each type of repayment strategy, e.g. loan-to-value limits, minimum equity requirements, etc.
• Lenders must obtain evidence of the repayment strategy before entering into the mortgage.
• The lender must keep a clear and detailed record of each decision to lend on an interest-only basis.
• Lenders must then contact the interest-only borrower at least once during the term of the mortgage to establish whether the repayment strategy remains in place and still has the potential to repay the capital.
• The FSA do not propose to restrict interest-only from being used on a temporary basis as a forbearance method for borrowers with, or at risk of, payment difficult ties.

Other issues

• Lending into retirement - The FSA propose that where the loan extends into retirement, the lender will be required to adopt a prudent and proportionate approach to assessing income beyond the state pension age.
• Debt consolidation – The FSA are seeking feedback on two options for credit-impaired borrowers:
  • where a credit-impaired borrower is repaying debts from the proceeds of the mortgage, those debts are in fact repaid through direct payment by the lender; or
  • the lender is required to assume that the debts to be consolidated will remain outstanding by including them as ‘committed expenditure’ in the affordability assessment.
• Record-keeping – The FSA propose that propose to extend the record-keeping requirements to three years.

MMR survey results

Following our campaign to encourage mortgage brokers to ‘Join the debate’ www.tcfinfo.co.uk has delivered the collective results of 2697 questionnaires to the FSA on their latest proposals in CP11/31. The feedback was delivered to the FSA ahead of the 30th March deadline, and is to our knowledge, the largest collective response on behalf of individual advisers. Commenting on the results, a spokesperson for the FSA said “We welcome the fact that mortgage intermediaries have provided valuable feedback to our MMR proposals as we have progressed through the various stages of consultation. It is important that firms make their views known and we do take their comments into account when considering any amendments. The high response rate indicates that firms have found the TCFInfo MMR survey a convenient channel to direct their views and we are encouraged by their level of involvement.”

Read full survey result on the responsible lending proposals (PDF)