The Prudential Regulation Authority (PRA) has also warned lenders they may not be able to rely on contractual terms which will allow them to cease customer borrowing in certain circumstances.
The issues were raised in the second part of the PRA’s Solvency II: Equity release mortgages consultation and accompanied by a Dear CEO letter setting out the plans.
The new requirements will change how equity release providers assess their liabilities which could require lenders to hold more capital to cover their lending.
Initial plans were published in July, but the PRA opted to delay implementing the new approach until December 2019.
Assess likely future borrowing
In this second consultation, the PRA set out how frequently it would review the parameters lenders and insurers use to oversee their loan books.
And it also highlighted that lenders need to account for potential future lending when assessing risks of NNEGs.
“Future additional advances that are secured against the same property may increase the overall risk that the NNEG bites, and the PRA proposes that this risk should be recognised,” it said.
“The PRA therefore proposes that firms should use best-estimate views of future borrower behaviour when assessing the risks of future lending to existing lending.”
It also proposed that firms should recognise risks to principal or interest beyond best-estimate expectations.
Are contracts legally enforceable?
A further element to this regarded whether lenders would be able to stop lending as they expect to.
The PRA warned these contractual terms “which purport to allow a firm to cease providing future advances in certain circumstances for example, that they are dependent on current lending criteria”, may not be enforceable.
“The PRA proposes that firms should not assume that they can rely on such terms when calculating their allowance for the risks of future lending unless they were able to justify that these terms were both:
- consistent with their business plans with due consideration given to the franchise risk which could arise from such actions;
- and enforceable, having considered carefully any legal and conduct requirements and expectations, including how a court might view these terms.
In particular, it highlighted fairness under the Unfair Terms in Consumer Contracts Regulations 1999 (for contracts entered into prior to October 2015) and the Consumer Rights Act 2015 (for contracts entered into subsequently).
Insurers taking too much benefit
In its Dear CEO letter, the PRA explained the aim of its proposed test was to help it determine whether insurers appear to be taking inappropriately large adjustment benefit from restructured equity release mortgages held within portfolios.
The consultation closes on July 3.