The Financial Services Authority (FSA) has reported a mixed result following the completion of its research and mystery shopping work on self-certification mortgages.
The City watchdog says mystery shopping of 41 mortgage intermediaries found there was no systematic fraud regarding inflation of income to obtain a larger mortgage. But three firms were prepared to discuss with clients how they could inflate their salary in this way, which the regulator says it has followed up with the firms concerned.
In supervisory visits the FSA found that in 47% of 249 cases reviewed the firm was unable to demonstrate it had appropriately assessed affordability. And in 36% of cases no reason was given, or the reasoning was unclear, as to why a self-certification mortgage had been recommended.
Cive Briault, managing director of Retail Markets at the FSA, says the findings on sales and advice from brokers show significant weaknesses which are disappointing. He calls for further work to be done not only on affordability and suitability checks but also on the record keeping of advice given.
He did however take some encouragement from the fact there was no evidence to suggest that salary inflation is widespread or systematic within the broker industry.
The regulator also says it welcomes the improvements made by lenders in the way they operate their self-certification mortgage business since issuing its Good Practice Guide in February 2004.
In general, says the FSA, lenders have strengthened systems and controls leading to increased detection rates for fraudulent applications; made improvements in the quality of information transferred to underwriting departments; and improved identification of staff training needs for self-certification business.
Moreover a number of lenders have had to take specific corrective action as a result of FSA supervisory work.
Briault says: "We welcome the improvements made by lenders in the area of self-certification. But in the light of competitive pressures, tighter margins and rising arrears levels, we expect lenders to remain vigilant and to ensure that their systems and controls are regularly reviewed."
The Council of Mortgage Lenders (Cml) has responded by saying it is pleased the conclusions of the FSA’s review has found lenders have been improving their operation of self-certified mortgages.
Michael Coogan, director general of the Cml, says: "The FSA has recognised the lending industry's commitment to ensuring that self-certified mortgages are sold in a responsible way to those for whom they are appropriate. This is good news, as self-certification is a big help to many people who do not fit traditional lending criteria.
"But we need to work with brokers to ensure that good practice becomes ever more widespread, and to minimise the potential for misuse of self-certification."
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Matthew West on 020 7484 9893 or email [email protected].IFAonline
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