The mortgage market review update
On the 26 April 2013 the changes to the mortgage market are coming into effect.
The greatest changes relate to the affordability requirements – placing the responsibility on lenders to assess affordability; verify the information provided and stress test the borrower's ability to repay the mortgage in the event of future interest rate changes.
Set out below are the key dates for the FSA's implementation and communication strategy.
The FSA has developed a seven-point plan of communication and assistance for firms. The FSA's plan is to:
- Track firms progress in the second quarter of 2013 ("phase 1"). All lenders will be required to complete an online survey which will be followed up by visits and desk-based reviews. Phase 1 will focus on the larger lenders and mortgage intermediaries.
- Publish the findings of the phase 1 in the third quarter of 2013. The findings will feed into the next steps of the implementation strategy.
- Hold further workshops to address any issues arising out of phase 1 during the fourth quarter of 2013.
- Resend the online survey to all regulated mortgage firms to identify whether firms have made progress with their MMR implementation plans ("phase 2").
- Publish the findings of phase 2 in the first quarter of 2014.
Firms are asked to continue to check the timetable for updates throughout the implementation period.
By way of reminder
The key changes for intermediaries:
- The removal of the requirement on intermediaries to assess affordability.
- The removal of the non-advised sales process.
- Most interactive sales (face to face or telephone) to be advised.
- An execution-only sales process fro non-interactive sales (interactive and postal).
- Every mortgage intermediary required to hold a relevant mortgage qualification.
- It will no longer be compulsory to provide customers with an Initial Disclosure Documents (although they may continue to do so). Instead certain key information about a firm's service must be given to customers.
- The Key Facts Illustration will not have to be given every time the firm provides a customer with information about a product that is specific to them. Instead, it will only be required where a firm recommends a product or products, where the customer asks for a KFI, or where the customer has indicated what product they want on an execution only basis.
The key changes for lenders:
- Lenders will be fully responsible for assessing whether the customer can afford the loan, and they will have to verify the customer's income. Affordability will be assessed by taking into account a customer's net income and, the customer's committed expenditure and basic household expenditure – evidence should be requested in support, e.g. 6 months bank statements.
- Lenders must take account of future interest rate changes on the impact of the mortgage payments by applying a stress test.
- Lenders will still be permitted to grant interest-only loans, but only where there is a credible strategy for repaying the capital.
- There are transitional provisions that allow lenders to provide a new mortgage or deal to customers with existing loans who may not meet the new requirements for a loan. The borrowing will not be able to exceed the amount of their current loan, unless funding is required for essential repairs. The decision on whether or not to lend in these cases will remain with the lender.
High net worth and business lending
High net worth individuals
It was recognised that the new requirements arising out of the mortgage market review may not be proportionate for very wealthy customers.
During the consultation process consideration was given to carving out high net worth individuals from mortgage regulation completely, however, there was insufficient support for doing so. The solution was an alternative approach for high net worth individuals relating to:
- Disclosure – the tailored approach may be used, but where adopted the tailored approach must be used in all documents provided.
- Advice – a high net worth individual may get a mortgage on an execution only basis provided the customer has confirmed in writing that they are aware of the consequences of losing the protection of the rules on suitability and have elected to proceed on an execution only basis. High net worth individuals are not required to get advice even if they fall into one of the vulnerable categories (i.e. debt consolidation, right-to-buy, equity release or sale and rent back).
- Responsible lending – the overarching requirements of affordability will apply, but the lender has greater flexibility – the lender can take into account both the income and the assets of the customer. The lender is required to obtain evidence of the income and / or assets that the affordability is based on and the lender must apply the interest rate stress test.
A high net worth individual is defined as an individual having as a minimum net annual income of £300,000 or a minimum of net assets of £3m (the definition is intentionally different from that set out in the financial promotions regime for high net worth individuals).
This criterion applies to a person applying for a mortgage and also where a customer is guaranteed by a person who satisfies this definition. Where there are two applicants, one individual must meet the definition in their own right, it is not permitted to add them together.
During the consultation process it was acknowledged that business lending is likely to be individually negotiated and adopting a standard approach will not work. The new provisions relating to advice and responsible lending will only apply where the loan is to be used entirely for business purposes.
Where the loan is not to be used solely for business purposes, the regulated mortgage contract requirements will apply. Lenders are also required to requested evidence that a loan will only be used for purposes such as a credible business plan.
- Disclosure – the current rules applying to the tailored approach will continue with an amendment to reflect execution-only sales for business lending.
- Advice – interactive sales may be conducted on an interactive basis. The customer must confirm in writing that they are aware of the consequences of losing the protection of the rules on suitability and have elected to proceed on an execution only basis. Unlike high net worth individuals business borrowers are required to get advice if they fall into one of the vulnerable categories set out above, although a business is unlikely to fall into a vulnerable category.
- Responsible lending – an affordability assessment is required for business loans however, they are set at a higher level than for mainstream mortgages, and recognise that a mortgage may be repaid from the resources of a business.
Second charge lending
Second Charge Mortgages are also due to transfer from the OFT to the newly formed Financial Conduct Authority alongside the wider transfer of consumer credit.
More detailed guidance as the shape that this will take is due to be published shortly.