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FSA warns lenders over interest-only mortgage contracts

The Financial Services Authority has warned lenders over the wording they use in their contracts for interest-only mortgages.

The FSA has been considering terms in interest-only mortgage contracts that allow firms to switch consumers from an interest-only mortgage to a repayment mortgage.

It believes some ‘switching terms’ in standard consumer contracts may pose a risk of being considered unfair, or of not being expressed in plain and intelligible language, under the Unfair Terms in Consumer Contracts Regulations 1999.

It says if a court deemed a term to be unfair under the regulations, the term would not be binding on the consumer.

This might result in the firm being unable to switch the consumer from an interest-only mortgage to a repayment mortgage.

Also, if a court deemed that a term was not written in plain and intelligible language, under the regulations the court could interpret it in favour of the consumer.

Under the regulations a term is unfair if it causes a significant imbalance in the rights and obligations of the parties to a consumer’s detriment, contrary to the requirement of good faith.

It says a switching term is likely to be unfair under the regulations if it gives the firm too broad a discretion to determine when the switching term will apply.

The regulator says switching terms are unlikely to be expressed in plain, intelligible language where the terms (i) are not clear about when a firm’s right to switch a consumer onto a repayment mortgage arises and/or (ii) fail to define key phrases in the contract which specify when the right to switch exists.

The FSA has warned firms to ensure their contract terms are not unfair and that they are drafted in plain, intelligible language by considering the requirements of the regulations.

It has warned firms that ultimately only a court can determine whether or not a term is unfair.

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  • Grey Haired Underwriter 16th January 2012 at 9:57 am

    To Stuart Duncan. You make the classic mistake thinking that IO is beneficial to the lender wheras the exact opposite is true. Repayment loans can generate far more income (I can do the maths if you like)andit is not so long ago that an IO loan cost 1% more than a repayment to make up for the smaller return on IO. I remeber a paper from a leading Buolding Society CEO who calculated that even this differential is insufficient to cover the lesser return on IO.

    I should also point out that contractually nearly every loan is repayment and that IO is a concession. so if the customer cvan’t meet their obligation why shouldn’t it show as arrears? might seem harsh but that’s the way the world is. If someone can’t afford to repay their car loan you wouldn’t ask the lender to manipulate the situation so that arrears didn’t accrue – or would you?

    And to anon – there is one simple fact that all lenders have to face up to. You may take responsibility for your commitments but the Courts think differently. if there is obne thing I am certain of these days it is simply that the lender is damned if they do and damned if they don’t.

  • Stuart Duncan 13th January 2012 at 11:36 am

    They would be far better clamping down on lenders who refuse to allow switches to interest-only when clients are redundant or hit financial difficulties. Most lenders now treat this as an arrears situation, despite the fact that they are gaining from it (debt remains higher for longer, attracting interest payments).

  • A very concerned member of the public 12th January 2012 at 5:26 pm

    The FSA are not at all intereestd in customers which is evryman on the street.

    They are simply protecting the government. I have read FSA polices on ” Treating customers fairly” and it only serves to deliver the opposite. I can make my own decisions thank you very much and can safely say without fear of contradiction that the FSA have made matters worse rather than better. I would like to be able to make my own decisions thank you and if I make a mistkae then I would take responsibility for it and take my own legal action against “rogue” brokers or bank.

    I am sick to death of this government removing every decision regarding my standard of life. BACK OFF FSA AND STOP BULLYING THE BRITISH PUBLIC!!!

    I would also like to ask what are the financial institutions and Brokers of this country doing to defend their clients rights??

    I would like to call an end to the FSA, LDisband this farcical department NOW. That alone would save this country Billions each year.

    Perhaps publications such as this one should open a public poll wrt public opinion on disbanding the FSA

  • A very concerned member of the public 12th January 2012 at 5:25 pm

    The FSA are not at all intereestd in customers which is evryman on the street.

    They are simply protecting the government. I have read FSA polices on ” Treating customers fairly” and it only serves to deliver the opposite. I can make my own decisions thank you very much and can safely say without fear of contradiction that the FSA have made matters worse rather than better. I would like to be able to make my own decisions thank you and if I make a mistkae then I would take responsibility for it and take my own legal action against “rogue” brokers or bank.

    I am sick to death of this government removing every decision regarding my standard of life. BACK OFF FSA AND STOP BULLYING THE POEPLE OF BRITAIN!!!

    I would also like to ask what are the financial institutions and Brokers of this country doing to defend their clients rights??

    I would like to call an end to the FSA, LDisband this farcical department NOW. That alone would save this country Billions each year.

    Perhaps publications such as this one should open a public poll wrt public opinion on disbanding the FSA