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MMR: Monthly cap on late payment charging proposed

  • 19/12/2011
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MMR: Monthly cap on late payment charging proposed
CP11/31 Mortgage Market Review proposals included in the FSA's consultation paper include a monthly cap on the number of monthly direct debits a lender can take from a borrower in arrears.

One unnamed lender made £2m from payment charging alone between March 2007 and 2008, according to evidence.

Other rule change proposals include barring lenders from bumping people off lower concessionary rates after missing a mortgage payment.

However, the regulator’s biggest concern is that arrears fee charging often fails to reflect the lender administration costs. Evidence suggests lenders simply benchmark against competitors, charge a percentage of the payment shortfall or charge a quarterly or annual charge regardless of the length of the arrears.

Following industry feedback, the FSA said it intended to ban lenders from offsetting other internal costs with arrears charging. For example, if lenders want to use managers to deal with arrears cases, it suggested lenders should pay for those costs themselves instead of calling them administration costs. Equally, the FSA said lenders shouldn’t include the cost of financial reporting.

Lenders must monitor their arrears costs, be able to offer a figure and charge accordingly, it said.

In another move, the regulator said removing concessionary fixed rates from mortgage borrowers in arrears was “not appropriate or reasonable” and could make things worse for the borrower. A rate should only be removed if a borrower has broken another element of the mortgage contract, said the FSA.

On the issue of forbearance, the regulator warned without “due care or knowledge and understanding of the impacts,” the practice can negatively impact lenders, borrowers and the market.

It published its practice guidance in October 2011 and said if measures are based on individual borrower assessment there shouldn’t be any conflict between prudential requirements and regulatory conduct requirements for the firm.

It expects to publish a further report on mortgage arrears handling by third-party administrator firms at a later date. But the FSA said it intended to regulate all regulated mortgage contract administrators, which will affect the third party administration firms handling mortgage books for unregulated buyers.

The regulator also said Early Repayment Charges should be a reasonable pre-estimate of the costs incurred by a firm. Its work so far shows lender practice in this area varies hugely and the regulator intends to report further on this at a later date.

Previously, the FSA uncovered poor treatment of borrowers in arrears and urgently released strengthened arrears rules in 2010. It also fined five lenders, including GMAC and Kensington, for poor treatment with fines and consumer redress totalling £19m.

The FSA CP11/31 cost and benefit analysis suggests this package of proposed arrears measures could stave off 175,000 arrears and 30,000 repossessions.

The consultation on the proposals finishes in March 2012.

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