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FCA cautions lenders on overstrict affordability criteria
The Financial Conduct Authority (FCA) is asking whether lenders are thinking about their customer’s best interests when assessing affordability under the Mortgage Market Review rules.
Speaking at the Council of Mortgage Lenders annual conference, Linda Woodall, director of mortgages and consumer lending at the FCA, said; “We always felt that the greatest impact would be felt by consumers with impaired credit, many of whom could only get a mortgage by self-certifying their income.”
“So today new customers with similar characteristics will find it harder to obtain a mortgage and those with existing would find it harder to move on.
“But we also recognised that there would be a number of perfectly credit worthy existing mortgage borrowers who would also not be able to pass the new affordability test. And lenders themselves told us they wanted the flexibility to help these borrowers and minimise the impact of the new rules.
“So it is disappointing to hear from various sources that some lenders are not applying the transitional arrangements in the way that we expected. Instead, some firms are applying strict affordability tests when the rules do not require them to do so. “
She added this results in existing customers who are not looking to increase their debt being unable to switch to a new deal. The FCA has seen numerous examples of customers who have been refused the option to switch to a product with a lower monthly payment on the grounds that the new loan is not affordable, despite the fact that they are ready to pay a higher monthly payment.
Woodall added that there were other cases “where borrowers are looking to downsize and so reduce their monthly payment and have been told that the new payments are not affordable. This is not common sense.
“So I question whether firms are truly thinking about their customers best interests,” she said.
She urged lenders faced with this situation to ask themselves whether refusing this change is a good outcome for that customer. Will they be better or worse off if they allow them to downsize or move to a better deal without borrowing more?
Woodall also picked up on pension calculations, noting that recently the minister for pensions has expressed concern that the stance some lenders are taking is resulting in consumers stopping their pension contributions in order to make a mortgage affordable.
She said: “Under our rules, pension contributions are not considered to be committed expenditure, because the borrower has the ability to flex pension payments. We expect lenders to exercise judgement as to the extent to which they need to factor pension contributions into an affordability assessment.
“We think some of these poor outcomes we have been seeing are as a result of firms adopting fixed advised sales processes.”