The Financial Conduct Authority said that while lenders were implementing responsible lending rules ‘broadly’ in line with its expectations, some had failed to fully grasp the new regime.
In the paper, Embedding the Mortgage Market Review: Responsible Lending Review, the regulator said all firms in its sample, which made up 75% of the post-MMR lending market, had income assessment processes in place.
It added, while there was no evidence of the intentional inflation of income, it did note that particularly in complex cases, some firms struggled to follow their own policies when it came to assessing income.
Where policies were less detailed, a greater degree of lending inconsistencies were prevalent. This had led to some firms struggling to establish eligible income.
One lender reviewed, used different approaches in calculating how much non-guaranteed income it would take into account when assessing the loan amount.
For borrowers with more complex employed income, some lenders appeared to have difficulty separating different types of variable income, such as shift allowances and overtime, from guaranteed income in order to verify it in line with their policy.
Others fell short in the level of evidence they asked for when assessing income which could vary from one month to the next. Some policies only required one payslip as evidence of a customer’s income.
In its findings the FCA said: “While this may be representative where the customer’s income is consistent, we did see examples where it was relied on in relation to variable pay as well. Using one payslip captures earnings at a specific point in time. If used in isolation lenders need to satisfy themselves that they have considered income over an adequate period to assess affordability.”
Brokers are all too aware of lenders’ hit and miss approach to self-employed income assessment which findings from the Responsible Lending Review underpinned.
The regulator said when assessing self-employed earnings, firms either looked at business accounts or self-assessment returns (SA302) that have been accepted by the Inland Revenue. It found that in assessing earnings, some firms appeared to make deductions such as tax and national insurance where the evidence of income suggested deductions had already been made.
In one instance the firm had failed to deduct any tax or NI from gross earnings.
To address these issues, the regulator has provided individual feedback to firms setting out the actions they need to take and where necessary firms will be placed under ongoing supervision.
