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News Analysis: Force lenders to free mortgage prisoners, MPs and peers urge

Commons group also warns over sales of loan books to inactive lenders

MPs have called for lenders to be forced to apply the FCA’s new affordability rules to help free mortgage prisoners, rather than making it optional as it stands under current proposals.

The argument was made by Conservative MP Charlie Elphicke at a House of Commons debate on mortgage prisoners, which was under way last Thursday afternoon as Mortgage Strategy went to press.

Elphicke, who is vice-chairman of the newly launched All-Party Parliamentary Group on Mortgage Prisoners, also argued that legislation was needed to prevent the Treasury and lenders from selling loan books to unregulated firms; something which Labour MP and fellow vice-chair of the APPG Rushanara Ali agreed with.

Elphicke said there were an estimated 200,000 mortgage prisoners trapped on expensive deals because of changes to regulation.

He said: “The rules say they cannot afford payments on a mortgage of 2 per cent, so they are forced to continue on a mortgage paying 5 per cent or more. It makes no sense at all.”

He said the FCA’s proposals meant that applying a modified affordability test was merely “an option, not an obligation” and later stated that “banks should be obliged to take customers on”.

Along with many other backbench MPs, Elphicke shared emotive cases from his constituents stuck on expensive deals, despite being at low loan-to-values and up to date with payments, who are suffering from stress, illness and financial hardship as a result of their situation.

On the subject of selling loan books to inactive lenders, Elphicke said: “The Treasury should not be selling mortgages off to Cerberus or any other ‘vulture’ funds without proper protection.”

He added that the approach of the Treasury and UK Asset Resolution to date seemed to be to achieve “the highest price at any price” when selling loan books, and argued that all mortgage book owners should be regulated so they can offer better rates to borrowers.

Another vice-chairman of the APPG, Labour MP Paul Sweeney, said Tesco Bank had confirmed to the group that it intended to seek an active lender as a buyer for its loan book following pressure from MPs, which he welcomed. However, he agreed with Elphicke that sales to active lenders needed to be “backed by legislation” and not left to the discretion of banks. Sweeney argued that the government should be liable to compensate people who have been trapped on high standard variable rates as a result of the sale of loan books to vulture funds.

The work of the FCA in addressing the problems of mortgage prisoners over recent years was criticised by several MPs as having taken far too long, with Ali describing the regulator as “utterly complacent” in its handling of the matter.

Launching its inquiry into mortgage prisoners last week, the APPG, chaired by Labour MP Seema Malhotra and Liberal Democrat Lord John Sharkey called on brokers to share their evidence and expertise to inform the group’s work.

According to the FCA’s projections, plans for a modified affordability test for mortgage prisoners who are up to date with payments could enable between 45,000 and 65,000 of the 140,000 borrowers trapped with inactive lenders to switch over to better deals.

But the APPG says that even in the regulator’s ‘high-switching scenario’, only 20,000-30,000 are likely to actually do so. Much will depend on how effectively the reforms are communicated to borrowers and whether lenders are willing to make use of the new affordability model to help these customers. Concerns also remain over how long it will actually take for lenders to reach the thousands of borrowers stuck on rates of 5 per cent or more while the reforms progress.

During their inquiry, the MPs and peers would like the industry to provide feedback on how likely it is lenders will make use of the new rules and what factors might prevent them from doing so. Independent consultant Dominic Lindley is helping the APPG gather and evaluate evidence. Speaking on behalf of the group, he said: “Advisers can help by responding to the questions we are addressing in the inquiry. In particular, it would be useful for brokers to share their views on whether they believe the FCA’s proposed rule changes will be enough to encourage lenders to offer better deals to prisoners trapped on high interest rates.

“We would also like their feedback on how lenders, mortgage book owners and administrators should be required to communicate the changes to borrowers, how many such communications should be sent out, what the content should look like, and how borrowers should be helped to find sources of impartial mortgage advice.”

The APPG is calling for mortgage prisoners to share details of their lender, interest rate and how their financial situation has impacted their lives. Advisers and other industry stakeholders are also asked to share their views on how policy decisions made by the government, UKAR and the FCA have affected mortgage prisoners.

The APPG wants to know whether protections for vulnerable consumers need to be strengthened. The MPs are asking for feedback on whether UK Finance’s voluntary agreement with active lenders has been effective in helping prisoners get better deals and how it could be improved.

Meanwhile, the FCA’s consultation on changes to responsible lending rules designed to help mortgage prisoners (CP19/14) ends on 26 June. Responses can be emailed to cp19-14@fca.org.uk, or submitted via the FCA’s website here.

Responses to the APPG can be submitted by emailing APPGmortgageprisoners@gmail.com and you can read more on the scope of the inquiry here.

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