The misreporting of arrears at Northern Rock exposed by the Financial Services Authority was part of a widespread practice among lenders to disguise arrears figures, Mortgage Strategy understands.
The FSA has fined two former directors at Northern Rock a total of £644,000 after the lender omitted nearly 2,000 loans from its arrears figures.
But one industry insider tells Mortgage Strategy that the problem of misreporting arrears goes far deeper than the issues at Northern Rock.
The source says that before the credit crunch it was common practice for lenders to disguise their true arrears figures by treating them as new business.
For example, if a borrower owed £100,000 but could only pay £10,000 some lenders would convert the £100,000 into an additional loan, thereby treating it as new business on their books.
The source says: “It was quite prevalent. And there’s no doubt it was down to the lax regime of the FSA, which did not check the returns that lenders sent in.
“What makes it even more tragic is a lot of people knew about this.”
David Baker, former deputy chief executive of Northern Rock, was hit with a £504,000 fine after the regulator discovered that 1,917 loans had not been included in the lender’s arrears figures.
Baker became aware that the loans had been omitted in December 2006 but although he investigated the matter in January 2007 he did not take it any further.
Loans were left out of arrears figures on the basis that repossession orders had been made by Northern Rock but the properties had not been repossessed. Baker went on to make misleading market statements, quoting the inaccurate figures.
Meanwhile, Richard Barclay, former managing credit director at Northern Rock, was fined £140,000 for failing to ensure reported information was accurate despite early warning signs.
Baker was also banned from performing any function in relation to a regulated activity, while Barclay was banned from performing any function of significant influence at a regulated firm.
Margaret Cole, director of enforcement and financial crime at the FSA, says: “This shows we are serious about taking action against senior directors when they step over the line.”