01 Apr 2014

The Mortgage Market Review - Responsible Lending Practice

The Mortgage Market Review - Responsible Lending Practice

Jane Gordon, Senior Solicitor, provides an overview of the recent Mortgage Market Review (MMR) and its goal to create a more consumer-friendly market.

Jane Gordon, Senior Solicitor, provides an overview of the recent Mortgage Market Review (MMR) and its goal to create a more consumer-friendly market.

The Mortgage Market Review (MMR) was intended to be a fully comprehensive review of the current mortgage market, undertaken by the former Financial Services Authority (FSA).  Its goal was to reform the mortgage market and to make sure that it was more consumer-friendly.  The new rules are due to be implemented on 26 April 2014.
 
The changes focus on five main areas:

1. Responsible Lending:

The new Rules make it abundantly clear that the Lender must assess the Borrower’s affordability of a mortgage. 
  • Intermediaries are expected to ensure that the Borrower meets the Lender’s known eligibility criteria, although there is no requirement to assess affordability.
  • The Lender must have regard to the Borrower’s overall income and expenditure, such as:  any future changes in his or her income and expenditure that can reasonably be foreseen and the impact on affordability of any future changes in the interest rate.  
  • If a Borrower wants to vary an existing mortgage contract, their affordability must also be assessed.

2. Interest-Only Mortgages:

The Lender must:
  • Ensure that the Borrower has a viable repayment vehicle in place to repay the capital balance upon expiry of the mortgage term;
  • Secure evidence of this repayment vehicle before the loan is advanced;
  • Contact the Borrower at least once during the duration of the mortgage to make sure the repayment plan is still in place;  
  • Ensure that the lending policy sets out the strategy for managing interest-only mortgages.

3. Transitional Provisions:

Exceptions to the Rules can be made where the existing Borrower wishes to vary the loan agreement where there is no increase in the amount borrowed and where the Lender believes that the variation will be in the best interests of the Borrower.

4. Advised Sales & Execution-Only Sales:

The Rules state that Lenders should not encourage Borrowers to opt-out of advice. In particular, it is clear that vulnerable Borrowers (such as those applying for SARB or right to buy schemes) must always get advice.

Only in the following circumstances can Lenders justify not giving advice:

  • Where the sales process is totally non-interactive (i.e. by post or internet)
  • Where the Borrower is a ‘high net worth’ individual, a mortgage professional or if the loan is solely for business purposes
  • Where the Borrower rejects the advice and wishes to choose their own product

In these circumstances, Lenders must confirm to the Borrower that no advice is being given and that the Borrower is therefore foregoing the protection of the Rules.

5. High Net-Worth Individuals:

There are some particular exceptions in respect of responsible lending where the Borrower is a high net worth Borrower (with either minimum net income of £300k or minimum assets of £3million). These are:
  • Interactive sales can be concluded on an execution-only basis (i.e. no advice is given) provided that the Borrower is made aware of the consequences of not receiving advice.
  • It is not compulsory for high net worth Borrowers who are also defined as ‘vulnerable’ by the Rules to receive advice.
  • Lenders themselves can decide how best to assess affordability but are still subject to the overarching principals contained in the Rules on responsible lending.

Conclusions:

It is likely that the new Rules will have a significant impact on the way in which mortgages are sold going forward, not least because the majority will now be taken out by the Borrower on the basis of advice in the sales process. 

However, it is still too early to tell just exactly to what extent the market will be affected, and whether these changes will afford Borrowers more protection and clarity.

Jane Gordon, Senior Solicitor


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