FCA aims to fix ‘divergent practices’ among mortgage lenders

FCA aims to fix ‘divergent practices’ among mortgage lenders

The Financial Conduct Authority is consulting on changes to its rules for how mortgage lenders dealing with customers experiencing a payment shortfall.

Rules currently set out in the Mortgages and Home Finance: Conduct of Business (MCOB) are designed to ensure lenders do not impose unfair or excessive charges.

In particular, the rules state how the regulator expects firms to allocate payments received from customers who are experiencing a payment shortfall.

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Having recently reviewed a number of firms’ allocation of payments processes, the FCA believes it would now be helpful to amend the definition of ‘payment shortfall’ to clarify expectations and help ensure an appropriate level of consumer protection.

The consultation paper noted a previous review of proposals to require firms to allocate a customer’s payments to paying off arrears before charges.

This requirement was designed to help consumers to exit arrears more quickly by prioritising payments from the borrower to the payment shortfall, rather than to arrears-related charges and the interest.

Following further consultation, the FCA updated MCOB, stating: “When a customer has a payment shortfall in respect of a regulated mortgage contract, a firm must ensure that any payments received from the customer are allocated first towards paying off the balance of the payment shortfall.”

However, the regulator has since identified “divergent practices” among firms when allocating payments received from customers who are suffering a payment shortfall.

It therefore proposes to clarify that, when a customer is suffering a payment shortfall, the firm must ensure that no part of any payment received from the customer is allocated towards paying un-capitalised interest, or charges incurred because of a payment shortfall before the balance of the payment shortfall has been cleared.

Where interest and charges have previously been capitalised, these now form part of the capital balance and are paid as part of the contractual monthly instalment; with a guidance provision to be added for clarity.

The regulator is looking for responses from firms currently administering mortgages and the trade bodies for these firms, with comments to be made by 10 August.

Michelle Lawson, director and adviser at Lawson Financial, said lenders should be doing this anyway, in line with the regulator’s Treating Customers Fairly doctrine.

“In my opinion, if a client has contacted the lender to say they are in difficulty, they should be helped if they are willing to pay and set up a payment plan. The whole point is to enable the clients to meet the payments and put them back where they started.”