Osborne was fired into action following a report by the Financial Conduct Authority (FCA) praising lenders’ use of Transitional Arrangements (TA) and a visit from Money Saving Expert founder Martin Lewis, on the matter.
In a letter to mortgage lenders, the Chancellor said he was ‘encouraged’ by the findings and stressed how important it was for flexibility to be practiced.
TAs were brought in under the Mortgage Market Review to allow lenders to waive affordability checks for credit-worthy borrowers, not upping the size of their loan, or creating a material impact on affordability. Under the Mortgage Credit Directive this was tapered back and became applicable only for lenders’ existing borrowers.
Despite being satisfied lenders were using TAs, in its report issued last month the FCA said some could be more ‘proactive and consistent’. In a separate comment, the regulator said lenders were adopting different approaches.
To shed light on how lenders were using the arrangements and how brokers were informed of the processes, Mortgage Solutions asked 22 lenders a series of questions to pin down exactly how their processes worked.
Varied and evasive
The responses, published in full in part two of the analysis, uncovered two interesting trends. Firstly, there were wide variances in how lenders identified and treated existing borrowers under the arrangements; some still insisting on full affordability as a place to start, while others relied on underwriters’ discretion.
Another trend that emerged was a reluctance, from some firms, to offer simple and transparent answers when asked to relinquish any details about their processes, other than the fact they existed.
Brokers and industry trade body, the Association of Mortgage Intermediaries (AMI), said this attitude signified that lenders did not want to nail their colours to the mast, giving them wiggle room over which clients they decided to help.
When lenders were asked how brokers could find out what their policy was and how its process worked, many lenders avoided giving straight answers. ‘Cases are looked at on an individual basis’, and, ‘each case is assessed on its merits’ were the phrases most commonly used, if any response was offered.
Mike Fitzgerald, sales director, Brentchase Financial, said it was almost as if lenders applied the Transitional Arrangements on a ‘whimsical basis’.
“There are a few lenders using [TAs] but it’s difficult to find out about them or how they are doing it. You can’t find out any policy on it so how can you recommend your client stays with their lender, or challenge any decision?” he asked.
“You go to one of the major lenders and you ask, ‘how do you treat your existing customers?’ They are so non-committal you can’t find out.”
What the big six say
Of the big six, Lloyds Banking Group’s process was the most difficult to uncover. When asked to explain its process the lender said: “We have defined circumstances in which [TAs] would be applied. The application of the [TAs] are embedded within our standard process.”
The lender declined to comment on whether borrower affordability was assessed or make clear how brokers could find out what their policy was. It did offer an example of an existing interest-only borrower, who on completion of a review, was found not to have a suitable repayment plan. Unable to transfer to full capital repayment the client would be offered a new product on part-and-part or interest only using the arrangements.
Barclays uses an automated system to flag cases where the TAs can be used which are then submitted for manual underwriting. The lender said because each customer was reviewed on a case-by-case basis it could not disclose its process to brokers. It declined to comment on what type of affordability assessment, if any, it used.
Santander and Nationwide were less precious about coming clean on their processes and said existing customers did not need to go through affordability checks when applying for new products if extra borrowing was not requested. Similarly, NatWest was happy to disclose it had a separate policy of pre-application assessment and a direct referral system for brokers with mortgage prisoner clients.
HSBC explained that as it has only recently entered the broker channel it expects to be minimally exposed to this issue. Customers needing to use TAs would be assessed in the same way as traditional borrowers by the bank.
Holding on to the old ways
Affordability checks, followed by a referral for manual underwriting, where clients are then assessed on a case-by-case basis was a common approach.
Skipton, Accord and Virgin Money all use this system, with small variations. Coventry confirmed it went a step further, explaining that borrowers who needed to be assessed under TAs would have to be declined before a flag was raised. Kensington’s customers will only be reviewed under the TAs if the customer or the broker flags the need to do so at the outset.
Of the 21 lenders surveyed, Precise and Bank of Ireland said they did not use the arrangements while several chose not to participate. Kent Reliance, Aldermore, Co-operative Bank/Platform, Principality, Leeds and Nottingham Building Societies all declined to answer any of the questions put to them. Clydesdale would only confirm the TAs were used for product switches but declined to give any further details.
Consumers at risk
AMI chief executive Robert Sinclair, said the findings exposed consumers were at risk of being treated unfairly, which was against regulations.
“There is no consistency among lenders,” said Sinclair. “The arrangements are being carried out almost on a discretionary basis, or individual cases are being argued as opposed to there being a standard process which they are taking all customers through. That can’t be right.
“If it’s discretionary and they are making judgements then not all customers are being treated the same and equally, which is in breach of the regulations.”
Simon Collins, product technical manager at John Charcol, said in the main the lenders he had dealt with for retention business were generally happy to accept clients. But Collins added that their unwillingness to divulge the simplicity of assessing and approving these clients may raise questions as to why, if it was so simple, these processes were not used for new borrowers.
“I think it’s for this reason lenders prefer to refer to the process as a client retention policy, rather than Transitional Arrangements,” he said.
Martin Lewis’s visit to George Osborne has raised the stakes, but without any definite obligation to use the arrangements in place of a full affordability assessment, lenders are unlikely to make wholesale changes. This, like the bid to increase the maximum age at retirement for borrowers, needs the combined power of all the sector’s stakeholders.
Lender and broker trade bodies, the press, intermediaries and consumer groups must keep this issue in the spotlight long enough for the government to place it firmly on its agenda and pursue it with the same vigour as has been shown in the buy-to-let market.
Lenders’ full responses to Mortgage Solutions’ survey can be found in part two: Mortgage prisoner survey: The results.
Post-publishing, Barclays requested the following comment be added:
“Barclays will allow existing customers, who are simply changing products without any additional borrowing, to do so without requiring an affordability assessment.”