Self-cert mortgages banned in regulation shake-up
The Financial Services Authority (FSA) today released major plans for a shake-up of consumer lending including a banning of self-cert mortgages.
The watchdog claims the changes are part of a "more intrusive and interventionist style of regulation", but the industry has hit back accusing it of "rabble-rousing".
Lenders will be ultimately responsible for assessing a consumer's ability to pay - as such self-cert mortgages - where borrowers provide their own details of income.
Self-cert mortgages were first designed for the self-employed, but they became the focus of lending problems as borrowers inflated their incomes and lenders were happy to accept this.
Cases of mortgage brokers and advisors suggesting people also push up or even invent their incomes to secure a deal were uncovered, with a number of brokers arranging mortgages for themselves based on false levels of income.
As such all mortgage advisers will have to be personally responsible to the FSA.
The FSA is also pushing to cover buy-to-let mortgages and all secured lending.
Bans on 'high risk' and complex mortgages, such as those aimed at credit-impaired borrowers that are also at high loan-to-income are also imposed.
Further changes see the banning of arrears charges when a borrower is already repaying to stop lenders profiting from people in arrears.
Jon Pain, FSA managing director of supervision, explained while the mortgage market has worked well for the vast majority of borrowers, some have suffered great financial distress.
"The FSA needs to ensure that firms only lend to people who can afford to pay the money back.
"We need to bring about a step change in regulation and we need to act now," he said.
He added the FSA research "clearly shows a rapid explosion in mortgage products; the emergence of high risk lending strategies which typically focused on higher risk borrowers; relaxed credit standards; and a mutual assumption by too many borrowers and lenders that the good times could not end".
However, mortgage lenders have accused the FSA of using "political rhetoric" over issues of mortgage lending that "seem more conducive to rabble-rousing than to properly considered debate".
The Council of Mortgage Lenders (CML) hit out at suggestions in the FSA working paper that regulation cannot rely on the notion of borrowers behaving rationally - that is, in their own interests.
It suggested the "regulator may instead need to introduce measures to 'protect consumers from themselves'".
CML director general Michael Coogan said: "As always with regulatory change, the devil may be in the detail
"We agree with the FSA that regulation in itself cannot resolve the problems of the recent market.
"However, we also agree that clearly delineated responsibilities, which remove regulatory ambivalence, will help lenders, intermediaries and consumers to know where they stand, and to accept the consequences of their actions."
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