The FSA has begun enforcement proceedings against five intermediary firms in the sub-prime mortgage market after finding "weaknesses" in lending practices and in firms' assessments of a consumer's ability to afford a mortgage.
An FSA report on the sub-prime mortgage market, published today, examined 11 lenders and 34 intermediaries and tracked 90 customer files from the point of contact with an intermediary though to the lender's decision.
According to the report, several issues have arisen for intermediaries and lenders when selling to sub-prime customers.
Clive Briault, managing director of retail markets at the FSA, says: "We are very concerned about these findings.
"Consumers in the sub-prime market are vulnerable people who may have high debts or a bad credit history. It is therefore important that they are properly assessed and advised.”
The findings revealed four major failings among intermediaries in the sub-prime market:
- A third of cases showed an inadequate assessment of a borrower’s ability to afford the mortgage.
- In half the cases reviewed there was a poor assessment of customers suitability.
- In over half the case studies the customer had self-certified their income and it was often not clear why they had been advised to do this.
- Large numbers of customers were advised to re-mortgage without the adviser demonstrating that this was beneficial to the customer.
Commenting on the findings, Briault says: "Poor sales practices in this market may lead to serious wider consequences.
"The high level of sub-prime arrears in a benign market raises some important questions about the consideration given to affordability by lenders and intermediaries when undertaking this business.”
The FSA has published a guide to good and poor practices on its website, and expects all firms in the sub-prime industry to read the guide.
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“When the FSA launched their investigation into the sub-prime mortgage market in 2005, there was concern across the industry that it could uncover widespread mis-selling. While this has not been found to be the case, as advocates of best practice in our field, the discovery of less than adequate record keeping is both disappointing and concerning.
It is vital that the right mortgage is matched to the right borrower and issues surrounding the assessment of needs, affordability and repayment become even more vital when it comes to the financially vulnerable, as in the sub-prime sector. Transparency is key in this market and without attention to detail, processes cannot be held properly to account.
It was also particularly disappointing to note that over 50% of sub-prime mortgages in the review had been arranged on a self-certified basis, a figure which is way in excess of what would appear in the mainstream market. As the FSA highlighted in the report, inflating income is a criminal offence and while there is no proof, one suspects that this may well have been the case in some, if not many instances.
We currently estimate annual lending in this sector to be around £30 billion, or approximately 8% of the market. As the amount of personal debt in the UK continues to grow, particularly in a rising interest rate environment, so will the number of borrowers with poor credit history. There must be the right solutions in place to break what can become a vicious circle of debt.
We recently launched a fees-free mortgage advice service to those with poor credit history and through this, we aim to set those people who are financially vulnerable on the right path by tailoring advice specifically to them. Our position as one of the largest mortgage brokers in the country means we hold a great deal of weight with lenders meaning we can often get people with a poor credit history mortgage offers that other brokers simply cannot. And, we are committed to finding all our customers a mortgage in the standard sector if we think they qualify for one.” Ray Boulger, senior technical manager, John CharcolIFAonline
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