All lenders with second charge lending permissions received the letters, according to the FCA, which in terms of seriousness sits mid-way between a thematic review and enforcement action.
The regulator completed a sector review last year which identified ‘significant concerns’.
By 1 May, all lenders must review all processes, systems and controls and confirm to the regulator they are lending responsibly.
Jonathan Davidson, director of supervision – retail and authorisations signed the letter, which outlined the five areas of concern for the regulator as assessments of overall affordability, income and expenditure , alongside lending risk oversight and financial crime.
In the letter, the regulator said: “We found a number of poor practices that led us to conclude that second charge lenders might not always be lending responsibly, leading to potential customer harm.”
Among the problems outlined by the regulator was the fact lenders appeared to be struggling with the affordability requirements, particularly since they became regulated under the MCOB rules in March 2016.
It said ‘we found examples where firms were not basing lending decisions on income and expenditure assessments. It is not sufficient to base a lending decision solely on equity, debt to income ratios or income multiples.’
It gave the example that an applicant with a heavy unsecured debt burden should have a large disposable income and that in cases, these figures were rarely challenged. In other cases, record-keeping was often inadequate to show how a lending decision had been reached, it said.
Income assessments for self-employed borrowers were also often very poorly handled.
The FCA said: “ In some cases, we were unable to identify where an underwriter had obtained the figures used for net income. We also found evidence that lenders were not always taking account of tax and national insurance deductions and were relying on calculations contained within accountants’ certificates and other documents that did not appear to be plausible or realistic.”
The letter concluded: “Please make certain that you would be able to evidence this review and the firm’s compliance with regulatory requirements, if asked to do so.”
Lenders were directed towards TR16/4: Embedding the Mortgage Market Review: Responsible Lending Review to approach the task correctly.