Loan-to-income caps could help curtail bad lending says Treasury


Loan-to-incomes caps are the ans-wer to reigning in irresponsible len-ding not loan-to-value limits, says the Treasury.

Last week the Treasury released a consultation paper on the proposed role of the Consumer Protection and Markets Authority, which it has renamed the Financial Conduct Authority.

In the paper it suggests an LTV cap could be unrealistic and it might be worthwhile to look at loan-to-income caps.

The paper says: “During periods of buoyancy in the housing market, rising property prices can facilitate additional borrowing and competit-ive pressures can encourage increases in LTV ratios on new mortgages.

“If commercial or residential property prices subsequently decline, balance sheets can become stretched and defaults can increase.

“Some jurisdictions such as Hong Kong have used maximum LTV ratios in an effort to discourage unsustainable mortgage lending and improve the resilience of their banking sectors.”

But it says enforcing LTV limits on commercial real estate could be undermined by cross-border lending and there may be an alternative means of achieving the same effect on the property market.

The paper adds: ” For example, by varying risk weights on certain types of mortgage lending and so the amount of capital banks must hold against their mortgage lending. Alternatively, loan-to-income limits could also be considered.”

The FCA will also have the power to ban a product it feels is too risky and to name firms and individuals being investigated for wrongdoing, before any action has been taken.

At present the FSA does not name firms until it has taken enforcement action.

Andrew Strange, director of policy at the Association of Independent Financial Advisers, is concerned about some of the pro-posals, particularly naming firms under preliminary investigation.

He says: “This is a worrying shift towards guilty until proved innocent. We are also concerned about the extent of wide ranging powers covering not only conduct of busi-ness, but also the ability to ban products.”