Impaired credit market will tighten but evolve under MMR
As lenders continue to pre-warn brokers about more detailed affordability checks and changing lending policies ahead of 26 April, Kensington said some lenders could leave the adverse sector all-together.
Roy Armitage, head of risk at Kensington said: “There may be occasion where the extra depth of information required by lenders – especially in relation to the quality of life and essential cost expenditure – may impact the size of loan an applicant may be able to borrow.
He added: “However, some lenders may, after reflection on the new rules and the operational implications, decide that credit impaired lending for debt consolidation is no longer within its risk appetite, assuming that it is already. Of course this depends on how lenders interpret reasonable steps.”
Armitage added though that if the larger players withdrew, the gap is likely to be filled fairly quickly by niche lenders.
In a debt-consolidation case for a credit impaired customer, according to MCOB 11.6.16R, lenders must take reasonable steps to pay off the outstanding debt and not leave the responsibility to the borrower.
The Financial Conduct Authority (FCA) said if the lender won’t take reasonable steps to repay the debt, the affordability assessment must include any outstanding monthly debt payments.
An FCA spokesman said: “In terms of cost, we believe that this is a proportionate measure to help make sure that people are able to afford their mortgage.”
In these cases, Kensington won’t pay the debt directly but includes it in the affordability assessment, where GE Money and Magellan settle the debt directly when the deal completes.
Kensington said all outstanding commitments will always be considered in the affordability calculator even if it is the client’s intention to redeem them.
Mark Snape, MD of lending at Magellan said the niche lending sector will be affected as prime lenders stopped consolidating borrowers with poor credit years ago, where roughly 30% of Magellan’s business involves capital raising.
“But when rates change, mortgages become more expensive and people possibly need to consolidate, these deals are likely to rise to roughly half of our business,” he said.