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FSA/PN/087/2008
5 August 2008

The Financial Services Authority (FSA) has reiterated today its call for mortgage lenders to ensure they are treating customers fairly in the current market conditions as its latest review finds weaknesses in the way some lenders are handling arrears and repossessions - particularly for consumers with impaired credit histories.

The review is the latest stage in the FSA’s ongoing programme of work designed to monitor the effectiveness of its regulation of mortgage lending, address key issues in the mortgage sector and ensure that consumers are treated fairly and can make informed decisions.

This latest warning comes as new data on mortgage lending from the FSA shows that the number of consumers facing arrears and repossessions, while historically low, is increasing.  Set against a background where the level of new residential lending by FSA regulated firms has declined from a peak of £102bn in Q3 2007 to £75bn in Q1 2008.  The data also shows that lending to customers with an impaired credit history accounted for two per cent of overall new lending during Q1 2008.

In dealing with customers in arrears, the FSA is calling on firms to be flexible, to make sure they consider customers’ individual circumstances and to use court action as a last resort.

Consumers also need to make sure they can afford the mortgage and if they are in trouble to talk to their lender immediately or contact a free independent advice agency. Information can be found on the FSA’s MoneyMadeClear website.

Lesley Titcomb, FSA Director responsible for the Mortgage Sector, said:

“As our data shows in these current market conditions more people are struggling to meet their mortgage payments and it is vital that firms treat them fairly.  This means paying attention to their individual circumstances and not repossessing their homes when there may be an alternative solution.  Repossession has to be the last resort.”

The FSA’s programme of actions to address the problem areas, includes a closer examination of charges, in particular the circumstances in which these are levied, and whether they are compatible with TCF; referring lenders to enforcement; ongoing supervision to ensure lenders improve their arrears handling; and supporting the Civil Justice Council in its proposal for a pre-court protocol.

A total of 13 mainstream and specialist lender brands (including impaired credit, buy-to-let, and self-certification, which account for a small portion of active and back books) were reviewed for the thematic work which looked at arrears and repossessions practices over the last few months.  Mainstream lenders were largely complying with FSA requirements and have policies and practices that should ensure that customers are generally treated fairly.

But there were particular concerns with specialist lenders, including that they:

• operated a ‘one size fits all’ approach, focused too strongly on recovering arrears according to a strict mandate, without reference to the borrower's circumstances;
• were too ready to take court action; and 
• had lower standards of systems and controls in place to control mortgage arrears handling, including training & competency arrangements.

The review also found issues with lenders in general, including that some:

• could have done more to consider customers' individual circumstances and offer more options to resolve the arrears position;
• imposed charges in circumstances that could result in the unfair treatment of customers; and
• did not exercise sufficient oversight of third parties contracted to carry out mortgage arrears and repossessions handling activities on behalf of lenders.

The FSA is following up with individual lenders and has published good and poor practice examples.

The FSA is also publishing results from two further reviews:

Responsible lending

A review of 18 lending firms found that some lenders (particularly those which offered mortgages to consumers with impaired credit) were not checking income where they should have had reason to doubt the amount declared and self certification of income was being used without adequate justification being recorded by the lender.

Also, some lenders' responsible lending policies were vague on the factors used to assess customers’ ability to repay and did not include any factors to assess ability to repay in retirement where repayments were to be made from retirement income.

As a result of the review, the FSA is considering referring several firms to enforcement and others have been asked to undertake further remedial work.

Good and poor practice examples.

Mortgage Quality of Advice

This review of about 250 firms offering mortgage advice was a follow up to the first Quality of Advice project reported on last year, which found weaknesses in key areas of firms' advice processes.  The second review was to determine whether firms have made improvements in these areas and the overall findings were disappointing.

As a result the FSA is telling firms that they must significantly improve methods of establishing affordability, including gathering better evidence to support their reasons for advice and doing more to take customers’ existing outgoings into account.

Seven small mortgage advisors have been0. referred to enforcement and a further 23 required to review customer files, which were found to contain insufficient evidence to explain and support the advice given.

Examples of good and poor practice.

Notes for editors

1. The FSA has published data compiled from Mortgage Lending Administration Returns (MLAR) provided by regulated firms for the first time today. It covers information reported to the FSA on residential mortgage lending. It also includes these firms’ non-regulated business, i.e. buy-to-let and second charge mortgages. This information will now be published quarterly.
2. Impaired credit history means at the time of the new loan application the borrower had: arrears of three months or more on a previous loan in the last two years; County Court Judgements over £500 in last three years; or is subject to a bankruptcy order or Individual Voluntary Arrangements at any time in the last three years.
3. Today the FSA is also publishing research on arrears undertaken as part of the second stage of its Mortgage Effectiveness Review, which was published earlier in the year. The latest findings indicate areas of non-compliance by firms with the arrears rules. This research was undertaken as part of the second stage of the Mortgage Effectiveness Review, which also considered consumer experiences in the sub-prime and lifetime mortgage markets.
4. The Civil Justice Council has proposed introducing a pre-court protocol, to ensure that lenders have met MCOB requirements before the courts will consider possession actions against borrowers in arrears.
5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
6. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.