The self-certification mortgage, like the rest of the market, has witnessed significant changes over the last couple of years following the regulation of mortgages from M-Day. But unlike the rest of the market, self-cert has had to break through a cloud of negativity among consumers and regulators alike. Brokers, lenders and distributors of these products have had to embrace significant ‘shape-up’ procedures before reaching the strong position they find themselves in today.
Self-cert has long suffered an image problem, perceived by some as the ‘mucky’ end of the mortgage market. Several BBC programmes aired in 2003-04 raised the public’s awareness to the manner in which self-cert was being offered by some intermediaries within the market.
The sector quite rightly came in for criticism, as a small proportion of firms were seen to be helping their clients overstate their income to obtain a larger mortgage. In these worst case scenarios, the behaviour of certain individuals involved could be deemed as nothing short of fraudulent.
The activity of these few unscrupulous intermediaries created a poor image for the self-cert market and also tarnished the reputation of many advisers and organisations who strive to work within the regulatory framework and offer excellent customer service and suitable advice.
Following the BBC broadcasts, the Financial Services Authority carried out a mystery-shopping exercise examining claims of fraudulent behaviour within the self-cert market. It looked in-depth at the advisory and sales practices of small brokers by examining customer files, with the research focusing on affordability, suitability and the accurate recording of advice being given.
The research findings showed many of the cases left considerable scope for improvement in the rationale for why self-cert was offered. Of 249 customer files reviewed, 36% either recorded no reason or were unclear as to why a self-cert product was recommended. Where proof of income was available, advisers had generally failed to record why a self-cert mortgage was recommended rather than a cheaper, full-status mortgage.
Further, taking into account the stated needs and preferences of the customer, 64% of the files reviewed did not adequately document why the recommended product was the most appropriate.
The research also found significant gaps in the files when justifying affordability. Of the files reviewed, 42% were for employed customers, while self-employed customers made up the remaining 58%. In 27% of these latter cases, it was unclear whether statements of accounts or other forms of income verification were available.
Approximately 47% of all the files reviewed did not adequately demonstrate that the adviser had appropriately assessed affordability.
The mystery shopping results showed that in only ” With the negative image starting to lift and mainstream lenders entering the arena, the potential for selling self-cert products is clear”a minority of cases had brokers asked sufficient questions regarding the customer’s expenditure. While it is for firms to decide what information they require to meet suitability requirements and how to obtain the information, brokers are required to ask certain questions.
These questions should offer information regarding clients’ fixed monthly commitments such as personal loans, variable household outgoings and monthly expenditure such as amount of council tax being paid and other similar household bills. In a small, yet significant number of cases examined by the FSA, these questions were clearly not being asked.
As a result of this mystery-shopping exercise, the FSA issued three minimum standard rules for the self-cert market, including the use of affordability checks, suitability checks and keeping a detailed record of advice to customers.
At Mortgage Advice Bureau, the number of self-cert cases is still relatively small, representing less than 4% of its overall business mix. That is not to say that this is insignificant but in the last two years, MAB has not seen substantial growth in this sector as a proportion of overall business activity.
However, different brokers have different product activity and a business that has significant distribution through the estate agency environment is likely to witness more mainstream status customers.
On the other hand, a broker operating in the re-mortgage arena may concentrate its marketing in a publication that has a higher exposure to self-cert business, since these customers, because of their employment circumstances, are more likely to seek the services of a broker. The negative fallout from past investigative documentaries led many organisations, lenders and intermediaries in the self-cert sector to re-examine their procedures and change their way sales are conducted.
With these changes in place and the migration of traditionally mainstream players into the sector, self-cert offers real potential for growth – and the opportunities for distributors are clear.
Figures from the Office of National Statistics show a steady increase in the number of self-employed workers, and they now account for almost 13% of the UK workforce. Self-cert is also being boosted by the increasing number of borrowers with unconventional income sources such as multiple income streams, regular rental income and bonus payments.
This trend is set to rise further as more people choose to freelance and subcontract. As the changing nature of employment continues to gather pace, more and more customers will fail to meet conventional income verification.
But while the market is set to grow, the industry faces new challenges ahead – including offering substantial proof of mortgage suitability for a diversifying market and defining a clear position for fast-tracking. Through the continued use of detailed income and expenditure calculators to demonstrate affordability with their customers, advisers can ensure suitability for self-cert mortgages. These tools provide a robust method for demonstrating both to the customer and for audit purposes why a mortgage product type is or is not suitable for each individual customer’s circumstances.
It is also important that fast-tracking is not seen as offering self-cert mortgages by the back door. Lenders who choose to operate fast track procedures do so based on the quality of the credit search and score. A lender which determines it unnecessary to see documented evidence of income or employment does so because the level of information obtained from the search and score is deemed sufficient for an informed lending decision without undue risk.
The adviser should, however, seek evidence to confirm affordability through pay slips, a P60, audited accounts, bank statements or a letter from an accountant confirming the business is trading, and keep copies on file for future audit purposes.
Further opportunities for self-cert arise when looking at the non-conforming sector, though lenders’ approaches to this vary significantly. A number of lenders will look at 90% self-cert lending where the customer has a low level of adversity. However, as the level of adversity increases, the maximum available loan to value tends to reduce. The lender’s attitude to County Court Judgements, dependant on either value or number, can also influence in which category a self-cert customer will sit.
Some lenders, such as First National and I-Group, will restrict self-cert to an income ceiling of 40,000 to restrict their risk exposure. With so many permutations possible, it can benefit a broker to access the services of a specialist distributor, which will often focus on a particular sector.
The FSA will be looking for significant improvements in the self-cert arena when it undertakes its next mystery-shopping exercise. Advisers must ensure they are not using self-cert as a quick fix where evidence can be provided to confirm status, and must always discuss with their customer the higher interest rates associated with self-cert mortgages.
With good communication between broker and distributor, and strong adherence to FSA standards, the MDprospects for all are considerable.
Brian Murphy is head of lending at Mortgage Advice Bureau