FSA attempts “common sense” approach to mortgages
The City watchdog claimed the long awaited plans would prevent a return of the risky mortgage lending seen in boom times by ensuring that common sense standards continue to apply in future.
Bringing together a process that began with a discussion paper in October 2009 and two much maligned consultation papers in July and November 2010, the FSA said it has “significantly amended the proposals” following industry feedback.
The 438-page document Mortgage Market Review: proposed package of reforms was released alongside a 198-page MMR data pack.
It said lenders must verify income and be able to demonstrate that the mortgage is affordable taking into account the borrower’s net income and, as a minimum, both the borrower’s committed expenditure, which includes the mortgage payments, and basic household expenditure.
As a result, the FSA said this would signal the end of self certified and fast track mortgages.
The FSA said the lender will have to undertake an interest rate stress test to consider how mortgage payments will relate to market expectations of future interest rate increases.
It also revealed a strict stance on interest only mortgages, stating: “Lenders should always assess affordability on a capital and interest basis, unless there is a clearly understood and believable alternative source of capital repayment.”
The FSA called for an easing of requirements on lending into retirement, it said lenders should adopt a prudent and proportionate approach to assessing income beyond state pension age.
It said: “This means that lenders may take a higher-level approach where retirement is a long way off, for example by requesting evidence of the existence of pension provision. Where retirement is closer, however, lenders might be expected to take more robust steps, for example by considering projections on pension statements.”
On distribution and disclosure, the FSA said the intermediary’s role in assessing affordability would be limited to checking that the consumer meets the lender’s eligibility criteria.
The document said: “We are not proposing to prevent lenders from outsourcing verification of income to an intermediary, but the lender will remain responsible for ensuring that income is verified in every case, and will be held to account if it is not. If lenders do outsource this activity, they will need to have appropriate systems and controls in place, and they must be able to meet relevant outsourcing obligations, such as those set out in our Handbook.”
The FSA said it would look to create a universal qualification standard, but only once there was an agreed MMR implementation date.
The document also proposes that that certain vulnerable consumers, described as those in equity release, right-to-buy, sale and rent back and those consolidating debt must always receive advice. However, it said all but those in sale and rent back could opt out.