FSA demands repossession fairness

Mortgage lenders must treat customers falling into arrears fairly and not take people to court as a matter of course

Recent research from the Financial Services Authority (FSA) finds weaknesses in the way some lenders are handling arrears and repossessions – with particular regard to consumers with impaired credit histories - so-called subprime borrowers.

As repossessions rise – with the FSA reporting a 40 per cent increase in the number of in the first quarter of 2008 when compared to the same period of 2008 – the problems are becoming increasingly pressing.

Furthermore, the total number of loans in arrears grew by 15 per cent in the year to quarter one of 2008, to stand at 302,000 - accounting for 2.44 per cent of total loan book balances.

"As our data shows in these current market conditions more people are struggling to meet their mortgage payments and it is vital that firms treat them fairly," explained Lesley Titcomb, FSA director responsible for the mortgage sector.

"This means paying attention to their individual circumstances and not repossessing their homes when there may be an alternative solution.

"Repossession has to be the last resort," he added.

The review was carried out to monitor the effectiveness of the FSA's regulatory regime of mortgage lending, seeking to address key issues in the mortgage sector and ensure consumers are treated fairly and can make informed decisions.

What are lenders doing wrong?

While mainstream lenders were found to be largely conforming to government and industry standards the FSA reveals problems with several specialist lenders.

Specifically the FSA has raised concerns with regard to lenders:

• Operating a 'one size fits all' approach; focusing too strongly on recovering arrears according to a strict mandate, without reference to the borrower's circumstances.
• Being too ready to take court action.
• Had lower standards of systems and controls in place to control mortgage arrears handling, including training & competency arrangements.

What can the FSA do?

The FSA’s programme of actions to address the problem areas includes a closer examination of charges, in particular the circumstances in which these are levied, and whether they are compatible with treating customers fairly (TCF) policies.

The FSA is also able to refer lenders to enforcement, carry out ongoing supervision to ensure lenders improve their arrears handling and support the Civil Justice Council (CJC) in proposal for a pre-court protocol.

Finally, the government body has also published a Good Practice guide to ensure lenders are aware of their responsibilities.

Industry response

The Citizens' Advice Bureau (CAB) has welcomed the FSA's calls, claiming its own evidence shows in some cases lenders have taken borrowers to court without exploring all the other options available to address the arrears.

This often results in excessive costs, stress and worry for borrowers.

"We call on the FSA to take urgent action on the findings of their research if the worst consequences of the deepening mortgage crisis are to be avoided," said head of CAB consumer policy, Sue Edwards.

"We believe this should involve strengthening the rules on mortgage arrears and lending practices."

In the financial year 2006/07 CAB in England and Wales dealt with over 57,000 problems about mortgage and secured loan arrears, an 11 per cent increase on the previous year.

Furthermore, these problems rose by 35 per cent in the first two months of 2008 compared with the same period in 2007.

"We also call on the government to introduce a mortgage pre-action protocol as soon as possible to ensure that lenders only take possession action as a last resort," continued Ms Edwards.

"In the meantime it is vital that lenders treat their customers fairly and sympathetically and consider alternative options to ensure that repossession really does become a last resort."

However, putting forward the case for the lenders, the Council of Mortgage Lenders (CML) argues the industry is already doing enough.

"The CML is surprised at the FSA’s observations on specialist lenders, who have been working extremely hard to manage arrears, but urges the FSA to work constructively with those lenders to ensure there is shared understanding and agreement about the FSA’s requirements," read a statement from the industry body.

"The mortgage lending industry is making strenuous efforts to ensure that repossession is only taken as a last resort, when other realistic alternatives cannot be found that balance the interests of the borrower and the lender."

The CML argues lenders are doing enough, specifically:

• Providing information for consumers on their own arrears management process to help borrowers understand what to expect and how they will be treated fairly.
• Contacting borrowers in good time when they are coming out of initial deals onto higher rates with increased monthly repayments, and encouraging them to make contact if a financial problem is likely to arise.

Chris O'Toole