The regulator today issued a Mortgage Market Review: Responsible Lending consultation paper, urging lenders to “get back to the basics” of responsible lending.
Among a raft of measures, it proposes imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay.
Lenders should also require verification of borrowers’ income in every case to prevent over inflation of income and mortgage fraud.
But the CML says the FSA’s proposes “prescriptive” approach to assessing applicants’ available income “may indeed make borrowing safer, but may also make it more difficult for households to get a mortgage”.
It argues most cases of mortgage arrears and repossession cannot be attributed to failures in the affordability assessment of the original lending decision, but to a change in borrowers’ circumstances.
The CML adds proposals requiring borrowers’ incomes be verified in all cases mean not only that “self-cert” mortgages will no longer exist, but also that lenders will no longer be able to undertake “fast track” mortgage processing.
But it says CML and FSA analysis suggests fast track loans have actually experienced lower levels of default than income-verified loans in the prime market. It says the proposals will “inevitably” mean higher administrative costs in processing loan applications.
In terms of affordability, the FSA plans to require mortgage affordability to be assessed on a capital repayment basis, even where the mortgage is interest-only.
The CML says most lenders already calculate affordability on this basis, so this is unlikely to be a concern in its own right.
However, it argues the position of borrowers who wish to transfer to interest-only to manage periods of financial difficulty needs careful consideration in terms of regulatory treatment and outcomes for consumers.
CML director general Michael Coogan says: “The main consumer concern right now is about access to finance, not about risky lending.
“The risk is that the gain will not match the pain in the short term. The industry and consumers will feel the costs of imposing new regulatory requirements now, in a market where they are not needed, but the potential consumer benefits will only be felt at some unspecified time in the future.
“We look forward to working with the FSA to ensure that a pragmatic approach to implementation can be adopted as far as possible, to reduce the negative side-effects that may arise from well-intentioned regulation.”
