Final MMR consultation paper is here

19 December 2011 | By Tessa Norman

It says it has significantly amended its previous proposals following detailed feedback from lenders and consumer groups, and is now asking for feedback on this final set of proposals.

Following consultation, it will decide the final form of the rules in summer 2012, but implementation will not be before 2013.

Key proposals include:

• Lenders should allow for the possibility that interest rates might rise in future when assessing affordability;
• Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise;
• Income will have to be verified in every mortgage application;
• Lenders do not have to consider in detail what borrowers spend but cannot ignore unavoidable bills, such as heating and council tax;
• Some applicants, such as those trying to consolidate debts with a mortgage, will have to get advice when taking out a mortgage; and
• Existing borrowers will be unaffected and lenders will have the flexibility to provide new mortgages to some existing customers even where they do not meet the new affordability requirements.

Lord Turner, chairman of the FSA, says: “We believe that these are common sense proposals which serve the interests of both lenders and borrowers.  

“While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.”

He says the FSA estimates that the proposals would only have a marginal impact in current market conditions, particularly for first-time buyers, but would act as a significant constraint if lending practices returned to those of the boom years.

He adds: “The proposals published today reflect the ideas and input of many stakeholders, including consumer groups and lenders.

“We believe these proposals will hardwire common sense standards into mortgage lending and guard against the risky lending practices of the past – leaving most borrowers unaffected, but better protected.”

A summary of the proposals from the FSA is below, but please see the latest news on Mortgage Strategy Online for more detailed analysis:

1. Responsible lending and interest only

• The affordability assessment: A lender must verify income and be able to demonstrate that the mortgage is affordable taking into account that figure for income and, as a minimum, the borrower’s committed expenditure (which includes the mortgage payments) and essential household expenditure.
• The interest rate stress test: The lender must also take account of the impact on mortgage payments of market expectations of future interest rate increases.
• The interest-only proposals: The lender must also assess affordability on a capital and interest basis, unless there is a clearly understood and believable alternative source of capital repayment.
• Repayment strategies: A lender may not accept speculative repayment strategies, such as reliance on increased property prices.
• Lending beyond state pension age: The lender should adopt a prudent and proportionate approach to assessing income where the mortgage term extends beyond the state pension age of the applicant.
• Debt consolidation for credit impaired consumers: For credit impaired consumers who are consolidating debts the lender will be required to either assume that the debts will remain outstanding by including them as ‘committed expenditure’ or repay the debts directly to the creditor.
• Transitional arrangements: We will allow lenders to waive the affordability rules when entering a new mortgage contract - providing the borrower has a good repayment history. These arrangements do not compel the lender to lend, ultimately that is a commercial decision for the firm.

2. Distribution and Disclosure

• Affordability: We have removed the requirement for intermediaries to assess affordability. Intermediaries will only be required to determine whether the consumer meets the lender’s expected eligibility criteria.
• Advice: We are removing the non-advised sales process and requiring all sales which involve spoken or other interactive dialogue with the consumer to be advised.
• Execution only: Knowledgeable consumers such as high net worth individuals and professional consumers can opt-out of receiving advice and purchase on an execution-only basis.
• Vulnerable consumers: Vulnerable consumers (i.e. equity release, sale-and-rent-back, right-to-buy and those who are consolidating debt) will not be allowed to opt-out of advice. However, with the exception of sale-and-rent-back consumers, they can reject the advice and proceed to purchase on execution-only basis.
• Non-interactive sales: With the exception of those we have categorised as vulnerable, where there is no spoken or other interactive dialogue in the sale (e.g. purely online and postal sales) consumers will be able to purchase on an execution-only basis.
• Consumer information: We have reduced our prescribed disclosure requirement for firms in order to reduce information overload for consumers. Instead we have re-focused our requirements so that key messages are brought to the consumer’s attention at the right time and in a way that they are most likely to be receptive to.
• Direct-only deals: We are making it easier for intermediaries to recommend a direct-only deal by removing the requirement to provide a Key Facts Illustration for those deals.

3. Arrears and Repossessions

• Arrears charges: We have strengthened our existing rules on arrears charges to address areas of poor practice and significant abuses found in arrears handling practices, for example changing guidance in rules on administration costs, or limiting the number of payments lenders can collect to two direct debits a month.

4. Non deposit-taking lenders

• Prudential requirements: We are introducing capital requirements to reflect the risks in non-bank lending. This includes requiring non-bank lenders adopt a more risk-based regime and increase their quality of capital.

5. Niche Markets

• The niche sectors of the market consist of equity release, home purchase plans, sale-and-rent-back, bridging finance, high net worth lending and business lending.
• The FSA wants to achieve the same broad outcomes for niche consumers as for conventional mortgage consumers so is proposing a straight read across of the majority of its proposals.

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