FCA’s Responsible Lending Review post MMR– TR 16/4

The FCA have published TR 16/4 to provide a feedback on the key findings of their market-wide thematic review of how firms were applying the new responsible lending rules introduced in April 2014 following the Mortgage Market Review (MMR).

This review looks at the impact of the MMR on the mortgage lenders responsible lending approach and it forms part of their wider programme of mortgages work that also includes the proposals outlined in the feedback statement of the mortgages Call for Input (CFI) on competition in the mortgage sector.

Summary of Key Findings
FCA found that most lenders were using the flexibility afforded by the FCA rules when dealing with their existing mortgage customers who want to make changes to their loan. However, they observed that where firms are prepared to use flexibility in the rules, they were not always doing so early in the process. In particular, there was scope for some firms to be more proactive and consistent in using exceptions to the responsible lending requirements for existing customers. The FCA have advised that whether or not firms choose to apply the exceptions, they (firms) should consider the fair treatment of customers when they (customers) want to make a change to their mortgage. In doing so, firms should ensure that customers do not face unreasonable barriers to changing product.

Key messages for firms

Adequacy of Affordability Assessment:
Firms have recognised the aim of the FCA’s responsible lending rules and have implemented them broadly in line with regulatory expectations.

FCA have further advised that, as firms continue to develop their processes, they must ensure that each aspect of their affordability assessment is adequate and appropriate to the circumstances of the customer, including the following.

• Income needs to be verified accurately in each case
• Where relying on modelled expenditure, firms need to assure themselves that the figures are based on realistic assumptions.
• When considering the effect of expected future interest rate changes, firms must have regard to both market expectations and any prevailing FPC recommendation, and to be able to clearly justify the basis used with reference to both.

Required Improvement in Record keeping for lending decisions:
Firms need to ensure they can demonstrate how they assess affordability in each case.

The review showed that most firms were using the flexibility allowed by the rules when dealing with their own existing mortgage customers. Where it is firms’ policy to use the flexibility, the FCA want some firms to improve their decision-making process for these customers, because they are not always using that flexibility early in the process. Their key observations in this respect are:
• Firms were prepared to apply exceptions to the affordability and interest-only requirements where the rules allow it.
• However, the processes for handling such cases were often time consuming. For example, some firms only consider using this flexibility after a customer has failed an affordability assessment. Firms should consider how they might improve processes and their impact on customers in these circumstances.
• Where a customer is unable to re-mortgage with another lender, the existing lender should not take advantage of the customer’s situation
to treat them any less favourably than it would treat other customers with similar characteristics.

Application of responsible lending standards for older borrowers and the
self-employed

• The FCA have said that they recognise it is for individual firms to decide whether and to what extent they wish to operate in these markets, but have pointed out that their rules do not prevent lending responsibly to particular customer groups.

Online calculators should provide a more accurate guide to the amount they are likely to be able to lend

• The FCA found some firms online calculators reflected firms’ affordability assessments and gave a fairly accurate estimate.

• Others were based on simple multiples of income which may provide fairly inaccurate estimates.

[FCA’s observations in the paper will serve as useful guidance to both first and second charge lenders who are now governed by the same responsible lending requirements set out in MCOB. We will be happy to assist firms that may need any guidance for developing or reviewing their Responsible Lending policy]