FSA calls on firms to improve arrears reporting
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The Financial Services Authority has called on lenders to improve their reporting of borrowers entering into arrears.
The regulator has issued guidance consultation for lenders and mortgage administrators and provided details of good and bad practices when dealing with customers in arrears.
It says where forbearance had 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 was often not reported, either internally through committee or board reporting or externally in the report and accounts.
The FSA says where this is the case, material market failure arises from the asymmetry of information between lenders and investors, and lenders and the regulator on the true state of the firm’s loan book and, in particular, on its level of impairment.
The FSA says lenders who do not disclose the true impairment condition of individual loans in their books create a misleading picture of the performance of their lending books, and thus there is a market incentive to do so.
In its report, the FSA says: “Forbearance provided to inappropriate levels arising from the incentive to misreport the true impairment condition of the book, may be a profitable way for firms to exploit an underlying asymmetry of information.
“This is likely to be particularly the case in an economic environment of falling or stagnating housing collateral prices.”
It says this may have cost implications for other financial firms, the government, and the consumer.
The FSA also says where firms are providing forbearance which materially changes the cash flow of the mortgage e.g. capitalisation, extension of the term, transfer to interest-only, utilisation of flexible terms, the firm should make an assessment of the customer circumstances and the key drivers for the change.
Where firms are extending mortgage terms beyond the State Pension Age, retirement income would need to be verified or a plausible repayment strategy put in place for when the customer reaches SPA. Another option would be for the terms to be reduced to ensure that the customer’s mortgage is returned onto sustainable terms once the period of financial stress had ended.
The FSA is calling for responses to its guidance by June 14 2011
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