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Underwriters may feel the heat on declined cases

There is a risk that underwriters could be pressured into approving fraudulent mortgage applications if they are required to explain why a case is likely to be declined, says the Financial Services Authority.

In its Mortgage Fraud Thematic Review, the FSA says some lenders require underwriters to contact brokers to explain why they may decline applications so brokers may put pressure on underwriters to approve borderline decisions when it is not appropriate to do so.

Under examples of poor practice at lenders, the review cites a firm that requires underwriters to justify all declined applications to brokers. This appears to contradict the European Commission’s mortgage directive, which says lenders must disclose their reasons for refusing a customer a mortgage.

But the Council of Mortgage Lenders has raised concerns in the past that this could help fraudsters manipulate lenders’ systems.

A spokeswoman for the FSA says: “We support the EC directive and agree lenders should disclose their reasons once a decision has been made, but we do not believe underwriters themselves should contact brokers before reaching a final decision as they may be persuaded to change their mind.”

David Hollingworth, mortgage specialist at London & Country, says brokers look for a flexible approach from lenders and would not want to see an end to the dialogue they have with underwriters.

However, he adds: “Lenders will want to ensure that they are not giving away too much detail about the way their systems work in case this exposes them to the risk of fraud.

“The best course of action would be for lenders to give general rather than specific reasons for declining customers, as there is value for borrowers in being told why they have been rejected.”

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