In its Retail Conduct Risk Outlook paper, the regulator said:
“We are seeing anecdotal evidence of unregulated buy-to-let mortgages being used fraudulently as a replacement for regulated residential mortgage contracts, as borrowers and intermediaries seek to circumvent more stringent income and affordability checks.”
The regulator warned that these instances of misconduct could increase and is especially likely as controls around self-certified mortgages have become tighter.
“The pressure to achieve greater margins on overall lending, given the current low returns available, and increasing competition in the buy-to-let market, might encourage firms to engage in this type of behaviour.”
The FSA said it’s also concerned that there may be inappropriate sales of bridging finance.
“We are already aware of this type of issue in the current market, and we are concerned that it could grow, especially as these contracts are usually more expensive and can appear more profitable to lenders and brokers.
“Firms on the fringes of the industry may be incentivised to develop and market products that fall outside the scope of our regulation.”
The regulator warned that the inappropriate use of products may, in certain circumstances, result in the consumer’s loan being unregulated altogether.
The FSA also expressed its concern over firms trying to increase business written before the MMR requirements come into force.
“This could result in a spike of poorer quality mortgage applications and approvals. However, lending and underwriting criteria have tightened very significantly since the financial crisis began and, therefore, unless the market starts to overheat again, we believe this risk is relatively unlikely to occur.”