Forbearance being used to hide arrears, says FSA
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The Financial Services Authority has accused lenders of using unnecessary forbearance measures in a bid to hide the true condition of their mortgage books.
Last week the regulator issued guidance consultation for lenders and mortgage administrators in a bid to improve their use of forbearance measures and reporting of borrowers falling into arrears.
The FSA says lenders that do not disclose the true impairment condition of individual loans in their books create a misleading picture of the performance of their books and so there is a market incentive to use increased forbearance.
The regulator says that where firms are using techniques which materially change the cashflow of the mortgage, such as extending the term of the mortgage, transferring it to interest-only, or flexing the terms of the deal, they need to make sure they are doing so for the right reasons.
It says that if these measures have an impact on the recognised arrears of the customer, either by stopping accounts going into arrears or reducing the severity of the arrears, the true underlying customer impairment is often not reported, either internally through committee or board reporting or externally in accounts.
In its guidance it says: “Forbearance provided to inappropriate levels arising from the incentive to misreport the impairment condition of the book, may be a profitable way for firms to exploit an underlying asymmetry of information. This is particularly likely to be the case in an environment of falling or stagnating housing collateral prices.”
Debby Cattell, head of servicing at Crown Mortgage Management, says forbearance tools need to be used appropriately by lenders and not just to make their arrears position look better.
She says: “There are feelings from the FSA that on its visits to firms it has come across some who are using forbearance measures for the sake of it.
“The FSA feels lenders are using it to put off the evil day when the borrower goes into arrears. If lenders are using it to stop someone from showing in arrears they are going to make their mortgage book look better than it is.”
As part of its consultation the FSA is proposing that firms do not put borrowers in a worse position than they already were, for example, by moving them to an interest-only mortgage which would not raise their prospects of improving their financial situation.
It also wants firms to ensure processes are in place for the identification, reporting, monitoring and loss risk assessment of forbearance provided to those facing arrears.
The regulator is calling for responses to its consultation to be submitted by June 14.
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