FSA under fire over new lending rules

The regulator is coming under pressure to change its proposed responsible lending rules amid concerns over the impact the current proposals will have for borrowers.

The Financial Services Authority’s Mortgage Market Review proposes that lenders must check borrowers’ income in all mortgage applications and impose tougher affordability tests, in a bid to protect consumers from taking on mortgages they cannot afford. The consultation period for the review closes next week.

Last week, the Council of Mortgage Lenders (CML), the trade body for lenders, urged the Financial Services Authority (FSA) to scrap its current proposals, which it claimed are “flawed and impractical”, and undertake a new draft set of rules.

A report by research company Policis, funded by the trade body, found that 2.2m current homeowners would have been unable to obtain their present mortgage under the FSA’s proposals. A further 3.4m current homeowners would have been able to take out a mortgage but at a smaller amount.

The report estimated that the new rules would stop about 150,000 home movers and first-time buyers from being able to move within the next year, with a further 330,000 forced to borrow less in order to obtain a mortgage loan.

Separate research by the CML, published this month, found that some 260,000 mortgages, out of a total of 567,000 loans, advanced in the first eight months of this year might not have been granted on their current terms if the proposals had been enforced.

“I think most people agree that the FSA’s proposals are all quite sensible in isolation, but it is how they may be interpreted and applied when all put together that could have a disproportionate impact on borrowers,” said Nigel
Bedford of Largemortgageloans.com.

Bedford believes there are a few areas that need revisiting, such as the FSA’s proposal to assess affordability over a maximum term of 25 years, even if the repayment period is longer.

He warned that the impact of the affordability calculations would be far greater on lower earners, as figures banks use for household expenditure are likely to be a fixed amount. First-time buyers could be adversely affected if lenders relied on actual past expenditure from bank statements, as many might change their spending habits if they got a mortgage.

Ray Boulger of mortgage adviser John Charcol agreed. “The FSA needs to recognise that the reason the vast majority of people get into difficulty is because of events that happen after the mortgage is agreed, either because they’ve lost their job or lost their overtime income.”

The CML believes the FSA has not carried out a full and accurate cost-benefit analysis of the impacts of all of its proposals on existing borrowers, and its potential impact on future borrowers.

However, the FSA claimed its own research showed that almost half of UK households had little or no money left after their mortgage and other bills were deducted from their income. It warned that even a modest rise in interest rates could lead to a “significant increase” in the number of families suffering financial distress.