T he sub-prime sector has come under yet more scrutiny with the Citizens Advice Bureau (CAB) report, Set up to fail, which was released in December. The report, which was based on 1,200 case studies from CABs, surveys and interviews with clients with mortgage or secured loan arrears, stated brokers were recommending inappropriate and unaffordable mortgages and secured loans to borrowers.
It pointed out that bad advice from brokers combined with irresponsible sub-prime lending decisions were driving the increase in arrears and repossessions. It also said many lenders and brokers had not carried out basic checks to ensure borrowers could meet the increased payments when discounted or fixed rates ended and that they had not explained the terms of mortgages to borrowers.
Peter Tutton, policy officer at the CAB, said: “In 2006, bureaux dealt with over 57,000 problems about mortgage and secured loan arrears. That is an 11% increase on the previous year, and poor advice has led to this increase. There is currently too little compliance on those giving this advice, and regulators need to clamp down on those getting away with giving bad information.”
More worryingly, the report alleged brokers encouraged sub-prime clients to present false information or submitted it without the borrowers’ knowledge. While most brokers have reacted with suspicion to generalisations taken from those surveyed, they agreed the report had highlighted some issues that brokers need to be sure they address in order to ensure the industry is completely clean.
Industry feeling is the increase in repossessions highlighted by the CAB is mostly caused by a combination of short-sightedness from consumers who jump into deals, and brokers who do not advise properly rather than investigating suspicious activity.
Fahim Antoniades, director of Quantum Mortgages, felt the report had raised concerns for brokers. He comments: “Brokers should always price for the worst case scenario. For instance, when advising a client on a mortgage, brokers must look beyond affordability, and I suspect there are advisers who try to make the deal fit at all costs. I do not think lenders are as much to blame as brokers, because brokers give more advice. However, lenders have to step up their game in terms of monitoring their source of business and identifying a list of rogue brokers, which will no doubt increase if repossessions rise.”
Roger Morris, managing director of EM Financial, takes a harsher line on the CAB, saying it was not qualified to be making decisions about the failings of lenders and brokers. He says: “People who come to the CAB will have mortgage arrears anyway, so of course there will be problems. However, for the CAB to turn around and say we are giving wrong advice, considering its position, is unhelpful to say the least.”
The CAB states sub-prime lenders are often more unwilling than mainstream lenders to negotiate affordable repayment arrangements with borrowers in difficulties and are taking court action for relatively small amounts of arrears.
Responding to this claim, Ian Giles, director of marketing at Kensington Mortgages, suggested that while the industry would take some of the findings on board, it was an inaccurate snapshot of the market. He says: “We feel the CAB has taken a sensationalist view, because the majority of customers do make payments. The sub-prime sector has been an excellent way for people to rehabilitate their finances. Also, if you wanted no court actions, you would never lend to any sub-prime customers. We are giving people a chance to get on the housing ladder and if we stopped lending, there would be an outcry.”
The CAB has said a key priority for the FSA should be improving the enforcement of regulation of intermediaries. The Council of Mortgage Lenders (CML) responded by saying there is a case for FSA regulation – which at present only covers first mortgages – to apply across both first charge mortgages and other secured loans, but it said the report was too simplistic in its criticisms of the lending industry. It also pointed out the vast majority of mortgage customers receive help from lenders if they fall into difficulties.
The charity made a number of recommendations on Government strategies for dealing with sub-prime borrowers, including that it should ensure the help available from the benefit system fits the needs of people borrowing from sub-prime lenders at higher rates of interest.
Ray Boulger, senior technical manager at John Charcol, believes the FSA must continue to rely on specific reports from big lenders which were more likely to pinpoint unscrupulous brokers. He says: “Regulation must be targeted well. The FSA should continue to focus on the reports from large sub-prime lenders on small firms to find rogue brokers because while this is not a certainty, it is more likely they will find the majority of problems in smaller firms, mostly because these firms have less stringent compliance systems in place.”
The charity concluded the report by saying it has pilots underway to increase people’s understanding of financial products. It also said it would welcome the opportunity to work more closely with the advisory sector to find ways to help borrowers better understand the advice they receive from intermediaries.
It is undeniable borrowers have been dealt a huge blow by the sub-prime crisis, but reporting on those borrowers who were always likely to fall into debt does not reveal anything new for the industry. Whether the industry and Government will implement the recommendations the CAB has provided remains to be seen. n