The Financial Conduct Authority has announced plans to look closely at the business models of subprime credit and second charge mortgage lenders.
In the regulator’s business plan, published today (April 17), it stated it was concerned the business models of some subprime and second charge products were designed to benefit from consumers not paying their debts.
Subprime credit mortgages are aimed at consumers with low or bad credit scores who may not fit traditional lending criteria while second charge mortgages let the consumer take out a second mortgage on their home.
Both products often have more flexible criteria and affordability checks attached as they were not included in the regulator's Mortgage Market Review, which tightened lending criteria.
Last month, figures from the Finance and Leasing Association showed second charge lending was on the rise.
The FCA stated it was concerned some firms within the sector make a profit from clients who do not or cannot repay in full and on time.
It said: "In recent years, we have introduced measures to help consumers in markets with a high incidence of poor value products, services or treatment of those in financial difficulty.
"We will use our findings to identify what action we may need to take."
But Daniel Yeo, owner of the Specialist Finance Centre, said the repossession rates on second charge mortgages were lower than they ever had been.
He said: "No one is in business to try and repossess people’s homes and it’s nowhere near as easy to get a deal through without the correct affordability now. If you look at repossession rates, it’s not rife with unaffordable loan books.
"It’s a pretty harsh assessment of the industry. In my experience, lenders stress test the proposed payments and factor in affordability.
"There is room for improvement, to catch up with the first charge market, but to say some second charge businesses are set up to benefit from consumers not paying their debts is a damning statement."
Shaun Church, director at Private Finance, agreed that second charge mortgages were not being mis-sold or sold to those who could not afford them.
He said: "There are many circumstances where someone is on a good first charge mortgage rate and it’s sensible and sound advice to take out a second charge mortgage.
"It is right to say the products are more flexible in their approach, but you have to go through similar affordability checks and prove you can afford it."
Mr Church said he thought subprime lending was also being processed in a way that was in line with that the FCA would expect.
He added: "It’s a good option for many people where first charge lending is that much more difficult now. There’s a place in the market for subprime lending and it is welcomed and well received by brokers.
"The alternative is that you have people forced to sell their house. If you can stop someone from having their family home repossessed then it’s a good thing."
But Dan White, from White Financial Services, said he thought the second charge and subprime sector criteria and affordability checks needed to be completely aligned with the first charge sector to avoid consumer detriment.
He said: "There is more work to be done in that sector. I think the criteria should be aligned with the first charge sector.
"The lenders are benefiting from a slightly lesser affordability model. Should they be benefiting from that? Or is that the lender being a little bit too flexible on who gets what loan?"
Mr White also said there could be hidden fees in second charge and subprime lending which would not be allowed in the first charge sector.
He added: "I think it’s right for the FCA to examine such models. The product has to fit the client's circumstances and there shouldn’t be hidden costs. The sector should align with first charge mortgages."
imogen.tew@ft.com
