Regulators poised to turn spotlight on mortgage lenders
The Mortgage Market Review (MMR) and the potential for future interest rate rises combine to bring the issue of mortgage sales suitability to the forefront of regulatory attention. Mortgage providers can expect to be subjected to greater critical assessment of lending practices, with substantial enforcement actions against those deemed to have fallen short in their standards.
Unprecedented levels of mortgage lending prior to the 2007-08 global financial crisis were followed swiftly by consolidation among mortgage lenders. Subsequent macro-economic pressures and regulatory scrutiny are revealing weaknesses in past business, as many borrowers find themselves unable to repay mortgages and the industry faces potential record repossession levels.
As the UK regulator seeks assurance of sufficient suitability levels to avoid a repeat of the Payment Protection Insurance and Endowment scandals, it has determined a clear list of priorities when reviewing industry and individual firm practices:
- Lending into retirement
- Debt consolidation
- Interest only mortgages
- Affordability and stress tests
- Proof of income / self certification
- Quality assurance functions
- Proof of the quality of the mortgage back book.
Of these, affordability appears to be at the heart of its present concerns. The tendency of late in the industry has been towards swifter decisions, utilising automated and less document-intensive application processing, thereby satisfying both consumers' desires for speed and minimum inconvenience, as well as the industry's drive for efficiency and cost control.
This approach is not necessarily conducive to rigorously assessing a prospective borrower's ability to repay a mortgage and the firm's consequent exposure, often resulting in less supporting evidence and documentation being collated. There is therefore considerable disquiet among some parties that this trend is responsible for a decline in the robustness and effectiveness of lenders' governance frameworks and the extent to which these guide suitable product sales.
Due to the extent of these concerns, and broader macro-economic and political considerations, we anticipate an increase in the regulator's activity. This expectation is based on a number of factors including the effects of the establishment of the Financial Conduct Authority (FCA), whose primary focus is on conduct-related issues, and the Mortgage Market Review (MMR). In addition, the fact that arrears levels remain relatively low as a primary consequence of the Bank of England's base rate raises, fears are present among the authorities over the likely effects of future base rate rises on customer behaviour and firms' mortgage books.
Although the regulator may appear to be dealing quietly with such issues, it is working in a focused and targeted manner. Industry members would be wise not to mistake subtlety for inaction, particularly as the regulator shows signs of taking an increasingly tougher approach to enforcement. The volume and size of fines levied on industry players is a further sign of the seriousness with which the regulator is reviewing mortgage sales.
As Margaret Cole from the FSA stated earlier this year: "Firms need to understand that we will not tolerate lax lending practices… Firms which fail in their obligations to customers should expect not only a substantial fine but also that they will have to pay back customers who have been disadvantaged by their failings."1
Agenda for action
Many lenders recognise the need to evaluate more critically their exposure to bad debts. Some are taking action to change their processes in order to mitigate risk. No matter what the stage of consideration, lenders should be asking themselves a number of key questions:
- How robust and effective were our governance frameworks in ensuring oversight and monitoring of mortgage sales historically and currently?
- How comfortable are we that the level of documentation held on file validates the sale of a particular mortgage as being affordable?
- To what extent do our processes rely on "tick box" underwriting?
- Would the customer know if it was an advised or non-advised sale?
- What impact does high, and rising, unemployment have on our mortgage book? Do we take into account local variations in employment and property values?
- What safeguards are in place, or are under consideration, to determine which of our existing customers are impacted and to service customers going forward?
- Are 'fast track' mortgage underwriting processes still appropriate?
- Are you actively contacting customers whose mortgages stretch into retirement, or who are currently on interest-only repayments, about their repayment plans?
Regulatory Risk Consulting
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