The long-awaited results of the FSA’s Mortgage Market Review (MMR) have been published today, prompting Jason McGee-Abe to highlight the implications it may have for the bridging market…
In December 2011, the FSA published its proposed package of reforms for the mortgage market together with a cost benefit analysis setting out its best estimates of the impact of its proposals (CP11/31 Mortgage Market Review: Proposed package of reforms).
Today, the FSA released its PS12/10 policy statement outlining the feedback to the consultation and the final rules it has reached regarding the MMR.
The FSA’s definition of a bridging loan as a regulated mortgage contract with a term of 12 months or less has been kept.
Affordability & checks
Most lenders must now verify income and be able to demonstrate that the mortgage is affordable taking into account the borrower’s net income and, as a minimum, the borrower’s committed expenditure and basic household expenditure.
The FSA has simplified its affordability requirements and checks will only be required if there is additional borrowing or a material impact on affordability, excluding contract variations or replacement contracts.
The FSA has also simplified its transitional arrangements by allowing lenders to make their own assessment about allowing exceptions to the affordability and interest-only rules.
High-net worth (HNW) borrowers, now defined as having a single income of £300,000 a year or £3 million in net assets, are also exempt from many of the affordability assessments required for mainstream borrowers.
The FSA has ruled that lenders may base their assessment of affordability for HNW mortgage customers on both the income and the assets of the borrower. They must also consider the expenditure of the borrower.
The majority of respondents agreed with the FSA’s read-across of the affordability proposals to bridging finance.
The FSA said: “Our revised approach allows lenders flexibility to make their own decisions about making exceptions to the affordability and interest-only rules for existing borrowers.”
The FSA has clarified what constitutes regulated advice and has admitted there had been a “misunderstanding” about the scope of its advice proposals outlined in CP11/31.
While most sales will have to be advised, advice will not be needed for simple contract variations – providing there is no increase in the amount to be repaid.
All ‘interactive sales’, those done in person or over the phone, will now be ‘advised sales’. There are exemptions, such as if the customer is a mortgage professional, a HNW individual, or a business borrower. All ‘non-interactive sales’, via post or the internet, can be conducted on an execution-only basis.
The regulator admitted it had underestimated the compliance costs of removing the non-advised sales process.
The FSA said one-off costs of the advice proposals are likely to increase from its previous estimate of £0.8 million to £2.8 million. It expects ongoing compliance costs on its advice proposals to increase from £1 million to £3 million.
It said it had revised its estimate to take into account the fact that some lenders have a much larger percentage of non-advised sales at present and may need to recruit additional staff.
The FSA asked: “Do you agree with our views…about the MMR proposals which are either not applicable or where a straight read-across to the bridging finance market is appropriate?”
Most respondents agreed with its summary. However, one trade body and several lenders were concerned that a read-across would have a detrimental impact on the bridging market. They agreed with the FSA’s aim of protecting vulnerable customers, however, and they asked for greater flexibility to allow for the wide variety of scenarios where bridging can be used.
Suggestions included making advice mandatory for anyone in arrears or who is otherwise credit-impaired while allowing lenders to make their own risk assessments.
The FSA’s response, however, was that it did not believe that its rules prevented bridging lenders from lending in a wide variety of scenarios. The FSA stated: “We would expect firms’ lending policy to reflect the nature of the market they are in.
“It was also made clearer that bridging lenders are now exempt, initially included, from having to get proof of income. Bridging loans are typically repaid on the sale of a property and there are no payments due during the term.”
The FSA has made it clear that the “responsibility for repaying an interest-only mortgage remains with the borrower”. The regulator added: “The lender cannot be held responsible if what appears to be a credible repayment strategy at the point of underwriting does not deliver.”
“All we expect a lender to do at the time of underwriting is to assess, as far as it is reasonably able to do so, that the repayment strategy has the potential to repay the capital, and nothing more”, said the FSA.
The lender must demonstrate it has made a ‘reasonable effort’ to contact the borrower to check a vehicle is in place, flag any problems and check the vehicle could repay the mortgage. Lenders can then request documentary evidence of a repayment vehicle if they wish, but evidence of a check is sufficient.
A few firms, mainly those active in the more niche areas, such as bridging and lending to high net worth customers, were concerned that they would not be able to document all possible repayment strategies in their interest-only policy.
The FSA has excluded bridging loans from the interest-only checks, due to the short-term nature of these arrangements.
The FSA sees that there may be a limited benefit to a mid-term check with a mortgage with a very short term, so it is disapplying this requirement for bridging loans.
Given that a bridging loan is for 12 months or less, the FSA do not see a need to check on the repayment strategy during the term and it has therefore changed MCOB 11.6.49R to make this clear.
Repayment & Exit strategy
The FSA has addressed the concern over keeping lending policies up to date with all valid repayment strategies in CP11/31.
“We explained that we would allow lenders to consider all types of repayment strategy as long as they operated within a framework of appropriate controls, set out in their lending policy.
“Regarding credit repair, we continue to believe that it is highly speculative for a customer to take out a bridging loan and expect their credit status to be repaired sufficiently to enable them to refinance to a mainstream mortgage. So we have retained the evidential provision MCOB 11.6.53E. Therefore, accepting credit repair as a repayment strategy, without evidence of a guaranteed offer for a longer-term contract, would tend to show a breach of MCOB 11.6.41R(1).”
Extending bridging finance loans
Few respondents were concerned that, as the majority of bridging loans are taken out on a retained interest basis, extending the term would involve borrowing more money. They felt that it is not clear from our proposals whether this additional borrowing would be a sale for which advice was required.
Some firms involved in HNW and business lending were concerned that these proposals would apply to some HNW and business loans (particularly secured overdrafts, which often have an assumed term of 12 months). They felt this would be overly onerous for these types of lending.
Where the loan is taken on a retained interest basis, an additional amount is added to the loan when the term is extended. However, this extra amount is interest on the loan that the customer has already received and is not additional borrowing.
The FSA stated: “When the term of a bridging loan is extended without any additional borrowing, the FSA regards this as a variation that benefits from the exception in MCOB 4.8A.10R
“We have amended MCOB 11.6.55R so that it does not apply to secured overdrafts for HNW mortgage customers or loans made solely for a business purpose.
“However, as set out in MCOB 11.6.56G, we will expect firms to act honestly, fairly and professionally, in accordance with the best interests of their customer, when they extend such loans.”
There are a number of exceptions from the rules around extending the terms of a bridging loan; these include the new rules made for secured overdrafts for HNW mortgage customers and secured overdrafts that are solely for a business purpose.
Intermediaries describing their service
The FSA had queried whether intermediaries “should describe the restriction on their service to the consumer” and identify which lenders they work with if they solely offer bridging loans. However, there are hardly any intermediaries who solely offer bridging loans to borrowers and a few respondents were concerned that describing their service could become complicated or impossible, given that there is no comprehensive list of all the bridging lenders. They suggested a higher level explanation of their service.
The FSA is proceeding with its proposals, but the “intermediary can say that they can say that they offer products from a comprehensive range of providers as long as they can demonstrate access to a sufficiently representative number. If they use a limited panel of lenders, we would expect them to know their names.”
Non-banks will be required to hold at least 20 per cent eligible capital, as they have “the potential to destabilise market confidence” if there was a big sudden shock to the market.
The FSA said: “These lenders are significant market participants and they can cause significant consumer detriment. Our view is that we should increase the quality and quantity of capital required for these lenders to increase their loss absorbency, which was a key failing across the market during the crisis.
“Holding a minimum amount of share capital and reserves should help a firm absorb losses while either continuing to trade or to help
It is also clear that higher LTV loans to first time buyers have not been banned and nor have interest only loans, with the critical focus rightly remaining on affordability.
The FSA’s responsible lending proposals are set to be implemented on 26th April 2014, and the regulator will conduct a formal review of their impact within the next five years.
B&C will continue to look at each section of the report in further detail, along with comments from leading industry figures, over the coming weeks.