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FCA implements changes to mortgage affordability assessments

  • 28/10/2019
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FCA implements changes to mortgage affordability assessments
The Financial Conduct Authority (FCA) has published and implemented its changes to mortgage affordability assessment rules to help mortgage prisoners.


However, it will not be extending the changes to accommodate borrowers who have arrears as a result of being stuck on far higher rates charged by inactive or unregulated lenders.

This has been a key concern of consumer groups supporting mortgage prisoners trapped with these lenders, and the FCA repeated its call for the government to extend its regulation to all mortgage loans.

The FCA confirmed to Mortgage Solutions that lenders can apply the different affordability rules to certain customers, rather than all those applying that meet the requirements.

In its PS19-27, the regulator confirmed that from today lenders will be able to use an alternative affordability assessment for remortgaging or switching customers who are up to date with their mortgage payments, do not want to borrow more, and want to remain at their current property.

Financing of fees including adviser, product and arrangement fees for that mortgage are also permitted within the borrowing.

Lenders using the modified assessment must tell consumers the basis on which their affordability has been assessed and provide additional disclosures about potential risks, and they will also need to report the number of sales completed this way.

The FCA is also enforcing that inactive lenders and administrators acting for unregulated entities, must review their customer books and develop and implement a communication strategy to highlight the rule changes and that they may be able to switch.


Not for arrears

In it’s policy statement the FCA said: “We do not propose to include those who are in payment shortfall (or who have been for any time in the previous 12 months).

“We also are not amending the rules to allow those with unpaid fees and charges to use the modified assessment. Demonstrating the ability to keep up to date with mortgage payments, and other fees and charges, over a significant period is key to the eligibility test.

“It provides an indication of the consumer’s likely ability to make future, lower payments under a more affordable mortgage,” it added.

The regulator continued: “Where these consumers’ mortgages are owned by an unregulated entity there are limits to our ability to address harm.

“Unregulated entities are required to have an FCA authorised administrator. However, depending on how the sale of the mortgage book to the unregulated entity is structured, this may not be sufficient for us to deliver the same level of protection as for consumers that have mortgages with regulated firms.”


Regulate all mortgages

In a call for greater powers to regulate these lenders, the FCA said: “Decisions about our regulatory remit are a matter for the government and parliament. In our view, there is a case for extending the regulatory perimeter to capture all mortgage loans.

“This would leave us better able to influence market behaviour through a combination of our Principles and rules.

“It would, for instance, enable us to challenge more effectively firms that do not adjust their variable rates on a basis that is fair to borrowers, and it could extend the coverage of the Financial Ombudsman Service to the purchaser of a mortgage book and their subsequent decisions.”

However, it warned that by itself changing the perimeter will not resolve the issues for consumers trapped with unregulated entities.

If the perimeter was extended, it would also need to assess the rules needed to support a wider remit.


Make changes quickly

FCA executive director of strategy and competition Christopher Woolard said: “Responsible lending is hugely important, and unaffordable borrowing is a cause of significant harm. Mortgage prisoners are often stuck on more expensive mortgages.

“We are removing barriers to switching in our rules and we would like to see firms make changes to their own processes quickly in order that customers can benefit as soon as possible.

“We are also taking steps to help those who have mortgages with inactive lenders or unregulated entities to ensure that they are aware that they may now be able to switch and save money,” he added.

Along with allowing fees to be added, the FCA also simplified the definition of a ‘more affordable’ mortgage to a test of whether the new mortgage has a lower total expected cost and lower interest rate, over the deal period or whole term if there is no deal period.

And the typical monthly payment under the new mortgage must be lower than the monthly payment paid in every one of the last 12 months under the current mortgage.

It will be monitoring and reporting on the number of mortgages completed under the new rules.


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