Your IndustryJul 30 2015

Changes to the lending process

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From 21 March 2016, an affordability assessment will have to be carried out by a second charge lender under certain circumstances.

The FCA states a lender must assess affordability where they take on existing borrowers from other lenders and agree to advance additional borrowing to existing customers to fund essential repairs to the property.

The City watchdog argues existing customers should not be prevented from switching products where there is no material impact on affordability, and where that change could be brought into effect through different means.

So, as is now the case, an affordability assessment will not be required where a consumer wishes to change a mortgage with their existing lender (for example, a rate switch), providing there is no additional borrowing and no other changes to terms likely to be material to affordability.

As part of the affordability assessment, second charge lenders must consider the impact of expected interest rate increases on existing higher priority mortgages – as well as on the second charge mortgage they are granting.

The FCA initially proposed that lenders should assess this based on the outstanding balance and current interest rate. However lenders expressed concerns about how this would work in practice.

They thought that consumers would not know the interest rate of their existing mortgage(s), and were concerned about the delays and costs that would arise if second charge lenders were required to obtain that information from other sources, such as directly from the first chargelender.

As a result, the FCA has removed the need to obtain the interest rate from the first charge lender.

According to the watchdog, this should simplify the requirement for firms, as they can get the outstanding balance (and current payment) from a credit reference without materially impacting the outcome for consumers.

However the FCA adds a caveat to this lightening of the rules by stating lenders must have regard to market expectations and any prevailing Financial Policy Committee recommendation on appropriate interest rate stress tests.

Advisers will also find second charge lenders must change their approach to ‘binding offers’. In the Mortgage Credit Directive, the EU insisted on lenders issuing these however the final FCA rules leave firms free to carry on making draft or indicative offers, which are non-binding, and then later issue a binding offer.

The FCA states a binding offer can include conditions, such as those linked to a change in the facts and circumstances upon which the lender has based the decision to make the offer.

However, the regulator argues that reserving a blanket right to re-underwrite the loan, as some second charge mortgage agreements currently do, is not compatible with the offer being binding.

Lenders will need to meet the requirements of the Mortgage Credit Directive, which includes a creditworthiness assessment.

While affordability-based lending is already a regular feature of second charge underwriting, Marie Grundy, managing director of V Loans, says stress testing on both the first and second charge loan will need to be introduced as part of the affordability assessment.

Second charge lenders will not have the benefit of Key Facts Illustration transitional arrangements, which asks brokers to spell out fees, and will need to produce European Standardised Information Sheet documentation, which is set to replace the KFI.

Ms Grundy says lenders must issue a binding offer at which point they will be committed to lending to the borrower(s) followed by a seven-day reflection period prior to release of funds.

There are many who think that the biggest change will come with affordability calculations, Nuala Wheeldon, compliance director of Fluent Money, points out.

However, unlike the massive changes which took place when first charge lenders implemented the ‘mortgage conduct of business’ requirements for affordability, Ms Wheeldon says second charge lenders are already making adjustments well in advance of next March.

As a result, Ms Wheeldon says she is not expecting there to be any real surprises from the introduction of regulation.

But Ms Wheeldon says the industry is keeping a close eye to see how lenders will implement stress testing on potential rate changes, which is another requirement under MCOB rules.

Overall she says clients and brokers are not going to see too much difference, as the incremental changes lenders are already implementing should mean a relatively seamless transition.