PRA sets out Buy to Let Lending Norms

The Prudential Regulation Authority (PRA) published a consultation paper on 29 March (CP11/16) which seeks the industry’s comments on a supervisory statement setting out the PRA’s proposals regarding its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts. The proposals also include clarification regarding application of the small and medium enterprises (SME) supporting factor on buy-to-let mortgages.

The supervisory statement follows a PRA review of underwriting standards in the buy-to-let sector which covered 31 firms (around 92% of the market). This review highlighted concerns about lenders’ growth plans and how they might meet them. In particular, there is a risk that firms relax underwriting standards, thus affecting their safety and soundness. The findings suggested a need for micro-prudential action.

The consultation paper proposes:

  • A set of expectations for firms that underwrite UK buy-to-let mortgage contracts where the land is intended to be occupied as a dwelling on the basis of a rental agreement, in pounds sterling, regardless of whether the borrower is an individual or limited company; and
  • A clarification in relation to application of the SME supporting factor on buy-to-let mortgages.

The Financial Conduct Authority regulates buy-to-let lending to related persons through its Mortgages and Home Finance: Conduct of Business sourcebook and lending in relation to consumer buy-to-let mortgage contracts through the Mortgage Credit Directive Order 2015. The PRA’s proposals do not apply to either of these types of lending. The PRA will also expect regulated firms to ensure that the standards contained in the supervisory statement are adopted by other firms undertaking buy-to-let lending within their groups. Comments are requested by 29 June 2016.

The standards proposed by the PRA mirror those set out by the FCA for regulated mortgages in terms of income verification, affordability assessment and interest rate stress testing albeit while recognising the different nature of risks and affordability criteria that would apply to the BTL sector.