In Mortgage Strategy September 8 2003 I mentioned that apart from it being covered in statutory regulation there was also an ongoing Office of Fair Trading study into debt consolidation practices. This study is now available (see www.oft.gov.uk) and I am sure you will agree it is an engrossing read. I want to draw your attention to the comments made by Jonathan May, director of the markets and policy initiatives division of the OFT. He warns: “Where lenders or brokers are in breach of the regulations we will not hesitate to take enforcement action.” Indeed the OFT March 2004 study says there is scope for further work not only by itself but also by the FSA and the government to improve the regulation of credit. Sufficient warning that debt consolidation could soon attain the same notoriety as self-certification.
Remortgaging for debt consolidation is a growth area. The OFT estimates that in 2002 £32bn of unsecured lending and £8.8bn of secured personal lending were used for debt consolidation. As I said last September you should proceed with caution when approached by clients looking to consolidate. In light of May's comments it is worthwhile reviewing your practices not only in line with current MCCB regulation but also taking into consideration FSA rules and, specifically, the OFT's recommendations.
MCOB 4.7.6 relates to regulated mortgage contracts where the main purpose is to consolidate existing debts. From October 31 a firm will have to take into account within its suitability assessment, where relevant:
The costs associated with increasing the period over which a debt is to be repaid
Whether it is appropriate for the customer to secure a previously unsecured loan.
Where the customer is known to have payment difficulties, whether it would be more appropriate for the customer to negotiate an arrangement with creditors than take out a regulated mortgage.
Nothing too arduous here and probably nothing more than you are already doing. The OFT study, though, goes further by recommending that in addition to working out what a client can afford, borrowers considering taking out a debt consolidation loan need to know:
What debt consolidation is and the alternatives
The interest rate and APR and whether it is variable
What the overall cost of the loan is
What the monthly repayments are
Whether there are any additional features which will change the rate at which the capital sum is paid back What will happen if they miss a payment
What happens if they want to repay or refinance early
The consequences of not keeping up with payments and what happens if they want to move house.
The OFT also plans to launch a consumer campaign to raise awareness and prevent unscrupulous lenders and firms from taking advantage of uneducated consumers. Notoriety indeed. This area of our business is well and truly under the spotlight. My advice is to adopt a back-covering approach and ensure you have covered all the points of consumer education above as a minimum.
Certainly in the last months of MCCB regulation, I would suggest including the following paragraph in suitability letters when recommending a debt consolidation remortgage:
“After discussing all of the options regarding your loans and credit cards (for example renegotiating with existing provider/switching to a 0% credit card) you decided you wished to consolidate these loans within your mortgage. You realised that by doing so you will be reducing the equity in your property and I confirm that I have made you aware of the dangers of substituting short-term unsecured debt for long-term secured. I would ask that you to think carefully before securing other debts against your home. Your home maybe repossessed if you do not keep up repayments on your mortgage.”
Again make use of a provision of information checklist, signed by your customer. For example:
“I/We have been advised of the implications of debt consolidation and after discussion I/we have discounted all other available options.”