RegulationAug 5 2014

FCA warns lenders of buy-to-let ‘gaming’ threat

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The Financial Conduct Authority has fired a shot across the bows of lenders over concerns that brokers or homebuyers may seek to ‘game’ new affordability rules and lending constraints by fraudulently submitting buy-to-let mortgage applications for residential purchases.

The warning is contained within a guidance paper published today (5 August) in the wake of a Bank of England recommendation to cap mortgage income multiples to stem house price inflation, which many fear represents an unsustainable ‘bubble’ and is pricing many out of the market, especially in areas such as London.

Included within the guidance is a requirement that lenders check their application processes amid concern buyers or their brokers may seek to submit buy-to-let applications for residential mortgages, as the former are unregulated loans that are excluded from the cap.

It says: “Buy-to-let mortgages are excluded as they are not a regulated mortgage product. We are conscious, however, that that some borrowers who are constrained by the flow limit might be encouraged to make fraudulent applications for buy-to-let mortgages.

“Given the severe penalties associated with mortgage fraud we do not anticipate that this will become a material point of leakage but we expect firms to ensure that application verification procedures for buy-to-let products are robust.”

FTAdviser previously received evidence relating to one broker that was removed from Lloyds Banking Group’s panels for so-called buy-to-let ‘gaming’, a practice which some claimed would rise in the aftermath of tough affordability rules under the Mortgage Market Review.

FCA guidance follows a report in June from the Bank of England’s Financial Policy Committee, which recommended regulators ensure mortgage lenders limit the amount of their customers that are able to take out a mortgage at more than 4.5 times their income.

The report stated that no more than 15 per cent of a lender’s book can account for such high loan-to-income multiples.

In the wake of the report, several lenders including state-backed Lloyds and Royal Bank of Scotland, Santander, Nationwide and most recently Aldermore, have all move to implement firmer caps on income multiples.

In its guidance the FCA says it will used the quarterly ‘product sales data’ return to measure lending against the cap.

It states that if a firm extends less than 15 per cent of their total number of new residential mortgages at or above the cap, “there should be no carry over from one quarter to subsequent quarters of any ‘un-used’ lending capacity”.

It adds: “If a firm extends 15 per cent or more of its total number of new residential mortgages at LTI ratios at or greater than 4.5, we may, on our own initiative, require the firm to stop entering into high LTI mortgage contracts.”