The long awaited Mortgage Market Review Consultation Paper has finally been published by the Financial Services Authority.
Below we summarise the main points contained within the 585 page document – full details of which are available here.
Responsible Lending and Interest only -
The affordability assessment
A lender must verify income and be able to demonstrate that the mortgage is affordable using that verified income figure and, as a minimum, considering the borrower’s committed expenditure (which includes the mortgage payments) and essential (i.e. non-discretionary) household expenditure, such as food, heating, Council Tax etc. This will effectively ban most fast-track mortgages as well as all self-cert as evidence of income will be required in all cases. The only possible exception would seem to be where the consumer maintains a bank account with the mortgage lender and income can be evidenced through account activity.
The interest rate stress test
The lender must also take account of the impact on mortgage payments of market expectations of future interest rate increases.
The interest-only proposals
The lender must also assess affordability on a capital and interest basis, unless there is a clearly understood and believable alternative source of capital repayment.
Repayment strategies
A lender may not accept speculative repayment strategies, such as reliance on increased property prices.
Lending beyond state pension age
The lender should adopt a prudent and proportionate approach to assessing income where the mortgage term extends beyond the state pension age of the applicant.
Debt consolidation for credit impaired consumers
For credit impaired consumers who are consolidating debts, the lender will be required to either assume that the debts will remain outstanding by including them as ‘committed expenditure’ OR repay the debts directly to the creditor.
Transitional arrangements
The FSA will allow lenders to waive the affordability rules for existing clients when entering a new mortgage contract - providing the borrower has a good repayment history. These arrangements do not compel the lender to lend, ultimately that is a commercial decision for the firm.
Distribution and Disclosure -
Affordability
The requirement for intermediaries to assess affordability will be removed. Intermediaries will only be required to determine whether the consumer meets the lender’s expected eligibility criteria.
Advice
The non-advised sales process will be scrapped and will be replaced by a more limited option to allow ‘execution-only’ sales. Mortgage sales will therefore need to be conducted by appropriately qualified individuals. All sales which involve spoken or other interactive dialogue with the consumer are to be advised. ‘Interactive dialogue’ will include telephone, fax, e-mail, social media, mobile devices including SMS/MMS texts and online propositions with the facility for live chats. Even online systems which steer the client towards a particular product rather than allowing them to choose are likely to be considered ‘advised’.
Execution only
Knowledgeable consumers, such as High Net Worth individuals and professional consumers can opt-out of receiving advice and purchase on an execution-only basis. However they must know precisely what they want to buy. To be eligible for execution only the FSA will expect the consumer to know, and to be able to provide the intermediary with, the following information about the product:
the lender’s name; the rate of interest; the interest rate product (for example, fixed, variable etc.); the price or value of the property (estimated where necessary); the length of term required; the sum the consumer wishes to borrow and whether they want an interest-only or a repayment mortgage
Vulnerable consumers
Vulnerable consumers (i.e. equity release, sale and rent back, Right to Buy and those who are consolidating debt) will not be allowed to opt-out of advice. However, with the exception of sale and rent back consumers, they can reject the advice and proceed to purchase on execution-only basis.
Non-interactive sales
With the exception of those the FSA have categorised as vulnerable, where there is no spoken or other interactive dialogue in the sale (e.g. purely online and postal sales) consumers will be able to purchase on an execution-only basis. However, the caveats noted above will apply – if the process leads to the filtering in any way of products, or guides the consumer towards a particular type of mortgage this will be considered as giving advice.
Consumer information
The FSA will reduce the prescribed disclosure requirement for firms in order to reduce information overload for consumers. This will involve the scrapping of the IDD. The trigger point for issuing a KFI will also be reduced to when
• an intermediary gives advice to the consumer to take out one or more products (a KFI should be provided for each product);
• the consumer requests a KFI, unless the intermediary is aware that it is unable to offer that product to them; or
• the consumer has provided the intermediary with details of a product it would like to proceed with under the execution-only sales route.
The FSA is also proposing to proceed with a requirement for firms to offer consumers a choice of whether to roll-up their fees into the loan.
Direct only deals
It will become easier for intermediaries to recommend a direct only deal by removing the requirement to provide a Key Facts Illustration (KFI) for those deals.
Niche Markets
The niche sectors of the market consists of Equity release (lifetime mortgages and home reversion plans), home purchase plans, sale and rent back, bridging finance, high net worth lending and business lending.
The FSA wants to achieve the same broad outcomes for niche consumers as for conventional mortgage consumers so is proposing a straight ‘read across’ of the majority of its proposals, affordability checks, income verification, etc. There will be a ban on speculative bridging loans and those with a term of more than 12 months in a radical overhaul of the market. To mitigate the FSA’s concerns over misuse of bridging loans it will require brokers to determine why a mainstream mortgage was not suitable for the customer as part of the bridging sales process, and force lenders to reassess customers’ ability to repay their bridging loan every time its term is extended.