The financial watchdog has written a ‘Dear CEO’ letter to all second charge mortgage lenders, detailing concerns over poor lending practices.

The Financial Conduct Authority has instructed the lenders to get their houses in order by the 1st May.

The letter follows a second charge mortgage sector review by the regulator completed last year which identified ‘significant concerns’.

Key problems

The regulator told CEOs: “We found a number of poor practices that led us to conclude that second charge lenders might not always be lending responsibly, leading to potential customer harm.”

These practices included difficulties with lending responsibly, particularly in assessing the affordability of customers. It stated that ‘we found examples where firms were not basing lending decisions on income and expenditure assessments.’

The FCA was also worried about inadequate record-keeping to evidence how lending decisions had been made, plus it said income assessments for self-employed borrowers were often very poorly handled.

The regulator explained: “We also found evidence that lenders were not always taking account of tax and national insurance deductions and were relying on calculations contained within accountants’ certificates and other documents that did not appear to be plausible or realistic.”

Review required

The letter concluded: “Please make certain that you would be able to evidence this review and the firm’s compliance with regulatory requirements, if asked to do so.”

Second charge lenders now have until 1st May to review their processes, systems and controls and confirm to the regulator they are lending responsibly.