The Financial Services Authority has reported a mixed result following the completion of its research and mystery shopping work on self-cert mortgages.
The FSA welcomed the improvements made by lenders in the way they operate their self-cert mortgage business since the FSA issued a good practice guide in February 2004.
The review work found that in general lenders have strengthened systems and controls leading to increased detection rates for fraudulent applications, made improvements in the quality of information transferred to underwriting departments, and improved identification of staff training needs for self-cert business.
Additionally a number of lenders have had to take specific corrective action as a result of FSA supervisory work.
Clive Briault, managing director of retail markets at the FSA, says: “We welcome the improvements made by lenders in the area of self-cert. But in the light of competitive pressures, tighter margins and rising arrears levels, we expect lenders to remain vigilant and to ensure that their systems and controls are regularly reviewed.”
The FSA also reviewed sales and advice on self-cert mortgages by small brokers. Mystery shopping of 41 intermediaries found that there had been no systematic fraud regarding inflation of income to obtain a larger mortgage. However three firms were prepared to discuss with clients how they could inflate their salary in this way and the FSA has followed this up with the firms concerned.
In supervisory visits the FSA found that in 47% of 249 cases reviewed the firm was unable to demonstrate that it had appropriately assessed affordability. And in 36% of cases no reason was given, or the reasoning was unclear, as to why a self-cert mortgage had been recommended.
Briault adds: “The findings on sales and advice from brokers show significant weaknesses which are disappointing. Further work needs to be done not only on affordability and suitability checks but also on the record keeping of the advice given. But it is encouraging that we have found no evidence to suggest that salary inflation is widespread or systematic within the broker industry.
“We will be working with the firms reviewed and today are publishing a summary highlighting examples of good and poor practice, designed to help intermediaries to understand and meet with our requirements.”