In a bid to stave off regulatory interference, the CML, IMLA and AMI are trying to forge a new understanding between brokers and lenders.
Michael Coogan, the Council of Mortgage Lenders' director general explains to editor of Mortgage Solutions Victoria Hartley what new ground the trade bodies hope to break
How did the initiative come about?
The Intermediary Mortgage Lenders Association (IMLA) and the Association of Mortgage Intermediaries (AMI) have been discussing the pros and cons of doing this work over an extended period.
As a result of the adverse change in market environment since 2007, and the risks to business structures posed by the MMR highlighted in our response in January, we decided to become directly involved in the work. We are seeking to drive forward a shared agenda between the whole lending industry and the intermediary sector.
How will the CML and AMI sell this to members - and how can the trade bodies ensure members will adopt its conclusions?
The members will welcome clarity and re-affirmation of the respective roles and responsibilities of lenders as mortgage providers and mortgage intermediaries as distributors. In fact, the members have been actively involved in its development.
The first output is not a description of something new or different but a confirmation of business relationships today as required by the FSA, its MCOB rules and TCF principles.
The reason why it will be welcomed is it will also enable the industry and the FSA to focus on the changes the MMR might make to existing relationships if pursued as originally proposed. The industry will be able to make a collective response rather than risk the FSA seeking to divide and rule by separating lenders and intermediaries, who in many regards have shared interests in delivering valued services to their customers.
Are the talks happening now to get a strategy in place before the FSA forces the issue?
There is undoubtedly a risk that the FSA will intervene to change the longstanding business structures in the mortgage market with its approach to affordability and income verification, among other things, in the MMR discussion paper. However, there is a broader and bigger picture which needs a more joined up response.
We have a sector (lenders and intermediaries) particularly badly hit by the closure of the wholesale markets, credit crunch and recession, and their aftermath shocks. We need to rebuild confidence and a shared vision about the "normal" competitive market of the future in the UK.
In this market, intermediaries will continue to have an integral and valuable role to play and we will also hopefully have a diverse range of lenders offering finance to help meet consumers' housing aspirations.
What form will the protocols take? i.e a handbook or something else?
Our plans on the initial guidance are well developed, but our work programme to take forward with AMI some shared agendas is at an early stage. We have no pre-conceived limits or preconceptions about outputs.
What kind of failures would you identify that have occurred between lenders and brokers?
The CML has sometimes been characterised as anti-broker. Nothing could be further from the truth as intermediaries continue to play a valuable role as advisers to borrowers who need it, and as a help to identify suitable products from across the market where customers do not want to go direct.
However, the CML is anti-poor quality advisers (identified in a series of FSA reviews) and intermediaries who abet customers to commit fraud, as evidenced by the ongoing stream of enforcement decisions. With the shrinkage of the market, these historical problems are being resolved and a smaller and more professional intermediary sector will remain.
Some lenders also made mistakes pre 2007. Whether we are talking about failing to price adequately for risk, making some lending un-commercial, or relaxing standards or delegating underwriting which has exposed them to fraud and higher risk of non-payment, or not embedding treating customers fairly principles, for example, in handing arrears and possessions.
The CML membership has shrunk, just as has happened in the intermediary sector, as those lenders have left the market. However, the remaining active lenders have addressed these mistakes, which is why we have argued the market has self- corrected and does not require an additional layer of mortgage conduct of business rules by the FSA.
In the current environment, disagreements have arisen on dual pricing, but we are simply seeing the reverse of the situation which existed when there was excess money available to lend out. There are also concerns underwriting standards are too tight, or product criteria too limited, but these are inevitable features of a market which is rationed and where the funding position in the next few years could get worse rather than better.
Why are lenders worried brokers' affordability checks won't hold up?
It is not a worry about what brokers may or may not do. It is a question of regulatory responsibility - it is the lender that will be pursued by the FSA if lending is deemed unaffordable or irresponsible. So will lenders be able to delegate any of this responsibility in the future if there is a tangible, higher regulatory risk? And, if not, will this mean the customer effectively has to go through the same process twice, as some form of affordability check is inherent in the suitability assessment which the broker will do? All these issues we flagged up in our submission to the FSA on its MMR proposals.
Contracts between brokers and lenders and commitments not to create dual pricing haven't been mentioned. Will they be a part of the discussions? If not, is that likely to happen?
The first stage is to focus on the FSA requirements, and our respective members are unlikely to want either the CML or AMI to get involved in contractual relationships or individual commercial business strategies. However, it is early days and so nothing is ruled in or out at this stage.
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