Brokers have role as responsibility takes centre stage

Lenders will be accountable for checking affordability but brokers must ensure deals are suitable for clients

David Geale

We recently published the latest paper in our Mortgage Market Review, featuring proposals to encourage more responsible lending.

I would like to explain some of the main points in the paper here, as I know Mortgage Strategy readers have taken a great interest in the proposals.

The aim of the paper is to get back to basics – consumers borrowing what they can afford to repay.

A key part of this is our make an assessment of affordability in every case.

As lenders bear the risk of holding mortgages on their books we believe it makes sense for them to bear ultimate responsibility for affordability and to be held accountable for the lending decisions they take.

But as we explained in our paper last October that does not mean we should reduce our affordability requirements for brokers.

Brokers still have a role to play in looking at affordability and the suitability of products, although these proposals mean that the ultimate responsibility for deciding whether consumers can afford to repay their loans lies with lenders.

We plan to publish a distribution consultation paper in Q4 2010 covering other issues of importance to brokers, but before then will continue to discuss our proposals with firms and trade bodies as always.

But our initial focus has been on lenders, and in addition to our affordability proposal we are suggesting that they should undertake and be responsible for verifying income for all mortgage applications by obtaining reliable evidence of income as stated on the application form.

The aim of our paper is to get back to the basics of consumers borrowing what they can afford to repay

This may seem like common sense to many readers but in the boom years some lenders lost focus of these basic principles of mortgage lending as house prices kept on rising.

Many customers were sold mortgages they could not afford and which could make sense for them only if they and their lenders assumed that house prices were a one-way bet.

The changes we have made with regard to income verification aim to ensure any assessment of affordability is based on true income rather than on a made-up figure.

It should also reflect the fact that self-cert loans incurred arrears rates three times higher than those in which income was verified.

While our analysis has shown that fast-track applications can perform better than those where income is verified, this has not been the case for all firms.

And, of course, a system where evidence of income is not required is open to abuse as we have seen.

We are particularly concerned that the absence of self-cert mortgages in future may result in an increased use of the fast-track process to find mortgages for consumers who may be unwilling or unable to prove they have the necessary income to support their application.

At this stage these are simply proposals. You can let us know your views by using the response form on our website or by letting your trade body know what you think.