The Financial Services Authority has begun enforcement against five intermediary firms for what it refers to as weaknesses in responsible lending practices and in firms assessments of a consumers ability to afford a mortgage.
The regulator has refused to name the firms but has said they include firms whose failings were identified during its initial study of the sub-prime market in 2005 but had failed to show adequate improvement.
The enforcement action follows a thematic review of 11 lenders representing more than 50 in the sub-prime market in terms of volume of sales and 34 intermediaries covering 485 customer files.
The FSA says while the research found no significant evidence of sub-prime mortgages being sold incorrectly to prime customers, several other issues were identified.
In a third of the files reviewed there was inadequate assessment of consumers’ ability to afford the mortgage and in almost half of the files there was an inadequate assessment of customers’ suitability for the mortgage.
Moreover, in over half of the files customers had self certified their income but in many cases it was not clear why they had been advised to do this. And significant numbers of consumers were advised to re-mortgage, thereby incurring early repayment charges, without the adviser being able to demonstrate that this was in the customer’s best interests.
Meanwhile, none of the 11 lenders in the review adequately covered all relevant responsible lending considerations in their policies. Some lending policies contained unclear affordability or self-certification requirements. And in many cases, lenders did not apply their own policies in practice, with some firms failing to check the plausibility of information, as required by their own lending policy. Some lenders also failed to monitor the application of their policies, which resulted in the approval of potentially unaffordable mortgages.
Clive Briault, managing director of retail markets at the FSA, warned of the regulator’s concern about the findings, adding poor sales practices in this part of the market might lead to wider consequences. “The high level of sub-prime arrears in a benign market raises some important questions about the consideration given to affordability by lenders and intermediaries when undertaking this business,” he adds.