In its report, Embedding the Mortgage Market Review: Responsible Lending Review, the FCA said firms’ failure to demonstrate their decision-making could make it difficult to ensure the accuracy of key systems, such as individual automated income tools.
Record-keeping rules set by the FCA require firms to make an accurate account of the steps they take to assess affordability.
The FCA said larger lenders were known to use automated models to speed up decision-making and lower costs, but warned that if firms did not test the accuracy of their system outputs, problems could go undetected.
One example in the report cited a firm that had unknowingly inflated a borrower’s income after it left out part of the affordability assessment designated by the lender to a particular customer segment.
The report also highlighted that the complexity of self-employed earnings was presenting challenges for some firms, with one lender failing to deduct any tax or national insurance from an individual’s gross earnings in order to provide an accurate affordability assessment.
The FCA added that during visits to firms, it saw evidence that some firms reliant on automated systems were not carrying out quality assessments from the application stage to lending decision, meaning compliance with the FCA’s rules and the firm’s own policy was not being tested.
“Most firms’ systems remove the ability for underwriters/quality assurance staff to view the internal workings of the system. This means the system outputs are not necessarily being questioned as part of the decision process,” the report said.
When asked how the regulator planned to protect customers being assessed using these tools, the FCA said it had given feedback to individual firms identified in the paper and intended to address the issue further in its review into competition in the mortgage sector, due to be published later this year.
“Most customers wouldn’t know if they were being looked at through an automated lending model or something more bespoke, but this is one of the reasons we want to be able to make sure customers are well placed to be able to look around at multiple options,” it said.