Clients losing out from MMR schizophrenia

From midnight tonight, under the provisions of the Mortgage Market Review, a new era of prudence and responsible lending will be ushered in that will ultimately protect borrowers from the sort of over-optimistic lending practices that defined the pre-crisis period.

A growing cacophany of discontent from brokers, however, suggests that at midnight tonight a schism will open up across the sector. In fact, some say it already has.

Many lenders have already implemented the new, tougher affordability tests they must conduct as part of every sale - which will now be classed as ‘advised’ except in a very few exceptions - under the new rules.

It’s all necessarily a bit nebulous, but lenders must “at a minimum” perform a thorough income check and assess both “committed and essential basic expenditure”. They must also test that future interest rates will not undermine a borrower’s ability to repay.

Natwest introduced its new approach in February. This week we reported on one couple in their 50s who are among the first case studies of clients that could find themselves on the wrong side of a nonsensical MMR-inspired demarcation of ‘responsible’ lending.

The couple were looking to port their existing 10 per cent loan-to-value mortgage on their £1.7m home to a similar-sized loan on a downsized £900,000 property.

Because their £74,000 annual income comes from assets and properties for which they have not amassed three years’ receipts, and Natwest does not take into account their £600,000 pension, they failed an affordability test. They must now pay £5,500 to escape their current fixed-rate deal and go elsewhere.

‘Affordability’ is being cited as a reason to prevent clients doing something that would de facto make their debt more affordable

For the record, the MMR transitional rules state lenders do not need to undertake an affordability assessment where existing borrowers are porting or are not increasing their outstanding loan size. Natwest told FTAdviser they treat such requests as new business anyway.

This is not the only example. In the comments section of this story, advisers relayed cases with other lenders such as the client that is being asked to prove they can afford to move to a five-year fixed rate of around 3 per cent, rather than staying on their current standard variable rate of 4.5 per cent.

In another case client was prevented from downsizing their loan by £50,000 because they failed a new affordability test - and so have been left servicing the far larger, and less affordable, loan.

In all of these cases, ‘affordability’ is being cited as a reason to prevent clients doing something that would de facto make their debt more affordable.

This schizophrenic approach is apparently being driven by paranoia from lenders, if you believe their advocates. The regulator has not been clear on how they must discharge their new responsibilities but has nonetheless signalled a tough stance. Banks have no choice but to apply the strictest criteria they can lest they get caught out later on, the apologists say.

Others offer more insidious reasons for bank behaviour: they are happy for clients to pay the hefty ERCs; they are taking the opportunity to downsize their loan book; they quite simply like the idea of clients paying higher fees to service larger existing debts.

Whatever the reasons well-meaning and initially well-drafted legislation is being interpreted in a farcical way and it is clients that are losing out.

The Financial Conduct Authority should step in. Its transitional rules also state, for example, lenders can ‘judge’ whether to ignore the affordability rules if it is in a client’s “best interests” for them to do so.

Surely Treating Customers Fairly rules demand that where something is in clients’ best interests it absolutely must be done?

I have previously stated my support of the new rules and will do so again here - they are generally proportionate and absolutely right for the market. The FCA must not allow client detriment from “over-interpretation” of rules to sour what should be a major policy success.