Fla Evidence To The Treasury

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FLA EVIDENCE TO

THE TREASURY COMMITTEE INQUIRY INTO

MORTGAGE ARREARS AND ACCESS TO MORTGAGE FINANCE

Introduction and Summary

1. The FLA is the leading trade association for the second charge mortgage

market, representing over 85% of the industry. Second charge lenders

include subsidiaries of some of the major banks and building societies,

together with other independent financial organisations. We welcome the

opportunity of providing evidence as part of the Treasury Committee’s Inquiry

into Mortgage Arrears and Access to Mortgage Finance.

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Second charge mortgage lenders are committed to helping customers in

financial difficulty. Possession is only taken as a last resort, once all other

reasonable alternatives have been exhausted. This approach is reflected

in the low level of repossessions, around 1,500 in 2008. Early indications

for 2009 show a relatively flat picture, but rising unemployment, could

perhaps push the figure to 2,000.

 

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The second charge mortgage market is highly regulated via the Office of

Fair Trading under the Consumer Credit Act 1974, and by FLA’s binding

Lending Code, supplemented by the industry’s new Good Practice

Guidance issued with Government approval last year. Together, these

ensure that borrowers with debt problems are treated fairly and

sympathetically and every attempt is made to agree an acceptable

repayment arrangement. Moving regulatory responsibility to the Financial

Services Authority would produce no benefit for borrowers, who would

actually lose important protections such as Time Orders, which require

additional forbearance on the part of lenders.

 

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Support for Mortgage Interest (SMI) should be payable on all second

charge mortgages (as it is for first charge mortgages). This would have a

real impact in alleviating mortgage arrears and preventing possession.

 

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Second charge mortgages play an important role in helping consumers to

consolidate their existing debts, at lower and more affordable rates of

interest. This provides real support for customers struggling with their

finances. But the market faces a funding crisis. The lack of wholesale

funds available to lenders has caused the market plunge by 90% in the

last year, with no sign of recovery. If funding continues to be restricted in

this way, this could have an adverse effect on the level of arrears and

possessions in the future, as customers would be unable to reschedule

their debts.

 

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Government lending support schemes currently only cover deposit-taking

institutions. Government support for non-deposit taking lenders is now

urgently required so as to reopen the wholesale lending markets. For

 

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example, amendments to the Government’s Guarantee Scheme for Asset-

Backed Securities to include the specialist lenders would allow lending to

consumers to recommence immediately.

Overview of the Second Charge Mortgage Market

2. Second charge mortgages play a key role in helping consumers improve their

homes in a range of ways, so maintaining the country’s housing stock and

mitigating the downward trend in property prices. Second charge mortgages

can also allow consumers to consolidate their existing debts. This is often at a

lower and more affordable rate of interest, which is particularly important for

customers struggling with their finances.

3. In 2008, the UK second charge mortgage market wrote an estimated £2.5

billion in new business, representing a fall in new lending of around 50%

compared to the previous year

. The average balance outstanding on second

charge mortgages is currently around £28,000, but new advances are on

average £14,000.

 

4.

The second charge mortgage market has been significantly hit by the

economic downturn, with new business 90% lower in April 2009 alone

compared to April 2008. The major reason for this fall is that specialist

lenders are facing severe problems in accessing wholesale funding. For

some lenders, the wholesale markets have closed completely. As a result,

many lenders have reduced their lending significantly, leaving some

customers unable to reschedule their loans to lower and more affordable

rates of interest. This could have an adverse affect on the level of arrears

and possessions in the future. It will also mean that significant numbers of

consumers could be driven into the unregulated market, as a last resort for

credit.

 

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For 2009, we have estimated that without a solution to the funding problem

for these specialist lenders, there will be around £1.4 bn of unmet demand for

consumer finance.

 

Arrears and Possessions: Trends and Forecasts

6. Second charge lenders are committed to helping customers in financial

difficulties. All such cases are treated sympathetically and positively.

Possession is only taken as a last resort, when all other reasonable options

have been explored. This is reflected in the low level of repossessions

initiated by second charge lenders. In 2008, there were 1,558 repossessions

originated by second charge mortgage lenders. This was 11% lower than our

forecast for 2008 of 1,750 repossessions. Our forecast for 2009 is 2,000

repossessions, based on rising unemployment.

7. There are also very strong commercial reasons why second charge lenders

only seek possession in the very last instance. When a property is

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repossessed, the first mortgage, together with any fees and charges levied by

the first charge mortgage lender, take a priority share of the proceeds of sale.

This could mean that a second charge lender does not recover the full

amount of their mortgage. Second charge lenders therefore want to work

with their customers to reach alternative payment arrangements, which will

keep the customer in their home.

8. In recent months, some second charge lenders have reported arrears levels

stabilising. But this could be adversely affected over the next 12 months by

the expected growth in unemployment.

Existing forbearance measures

9. The second charge mortgage industry is regulated by the Consumer Credit

Act 1974 (as amended in 2006) and the FLA’s Lending Code. All lenders are

licensed under the Office of Fair Trading’s Consumer Credit Licensing

Regime and must adhere to the legislative requirements for licence holders.

The Government undertook a detailed review of second charge lending

during 2008, and found no systemic problems.

10. Second charge lenders also comply with the Pre-Action Protocol for

Mortgages, published by the Civil Justice Council. Together, these impose

detailed requirements on how lenders will assist customers who have fallen

behind with their repayments.

(a) Industry initiatives to help borrowers

FLA Lending Code

11. The FLA Lending Code was established in 1992. It sets good practice

standards for all FLA members, including second charge lenders. These

standards cover the full life-cycle of a loan from the loan application stage

through to how to deal with financial difficulties, should these arise.

12. Under the Code, our members deal with all cases of financial difficulty

sympathetically and positively. They must also act fairly, reasonably and

responsibly in all their dealings with a customer. The overriding objective is to

work with the customer to agree a reasonable repayment plan they can

afford.

13. An independent Board oversees compliance with the Code, and a Disciplinary

Panel of the FLA’s board deals with egregious cases which might lead to

expulsion from the Association. The Financial Ombudsman Service has

recently stated publicly that the Code sets the accepted standard for the

consumer credit industry.

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Good Practice Guidelines

14. In November 2008, the FLA published additional

Good Practice Guidelines

 

for second charge lenders to apply when they are helping customers with

payment difficulties. These Guidelines provide additional protection for

borrowers and build on the consumer protection provisions already included

in legislation and the Lending Code. They also complement the work the

Government is currently undertaking on responsible lending. The Guidelines

were welcomed by BIS, the Treasury and the OFT.

15. Prior to the completion of a loan, second charge lenders will have already

carried out a comprehensive set of underwriting procedures to ensure that the

loan is affordable. Customers will also be advised of what to do if they find

themselves in payment difficulties.

16.If a customer is in financial difficulties, second charge lenders will:

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Clearly explain their procedures aimed at helping their customer.

 

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Discuss with their customer the options, and their implications.

 

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Ensure that the customer’s individual circumstances are taken into

account, for example whether the causes of the arrears are temporary

or long-term.

 

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Provide the customer with a contact point, in case they have any

questions and keep in contact with the customer on a regular basis.

 

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Ask the customer, in certain circumstances, to complete an income

and expenditure form setting out their financial circumstances.

 

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Consider with the customer a repayment plan which is realistic and

appropriate, given the customer’s circumstances, and which is aimed

at helping the customer remain in their home wherever possible.

17. Examples of repayment plans second charge lenders may discuss with

their customers include:

 

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arrangements to repay arrears over a longer period of time;

 

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changing the date of the second charge mortgage repayment or the

method by which payment is made;

 

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extending the term of the second charge mortgage;

 

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changing the type of second charge mortgage; or

 

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deferring the payment of interest due under the second charge

mortgage.

18. Second charge lenders will not take court action where a reasonable

repayment plan has been agreed and the customer is sticking to it.

19. Among other commitments in the Guidelines is a pledge to try and make

contact with any other mortgage lenders who also have a charge over the

property. This aims to avoid a situation where two lenders may take

possession action, incurring two sets of legal costs which would be met by

 

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the borrower. The FLA and CML are also collaborating to improve the

exchange of information between first and second charge lenders.

20. A copy of the Guidelines is attached to this submission.

(b) Legislative requirements to help borrowers

Consumer Credit Act 1974 (as amended)

21. The CCA 1974 (as amended) places statutory requirements on second

charge lenders when dealing with customers in arrears. These are set out

below and include both the provision of prescribed information and the

requirement to act fairly.

Arrears notices and default notices – Sections 86 and 93

22. When a borrower is two months in arrears with their second charge mortgage,

the lender is required to send a formal Notice of Sums in Arrears. Thereafter,

the Notice will continue to be sent every six months until the customer is no

longer in arrears or when a court order has been granted.

23. Where a lender intends to take possession of a property, Section 87 provides

that a Default Notice must be served on the borrower. The Notice must set

out that the agreement has been breached, and how this can be remedied.

Time Orders

24. Once a borrower has been served with a Default Notice, they have the option

to apply to the court for a Time Order. The Order is aimed at giving customers

more time to pay their debts, and would usually be made for a stipulated

period based on the borrower’s temporary financial difficulty. In agreeing the

Order, the court would look at what instalments would be reasonable and at

what intervals.

Unfair relationships - Sections 19-22

25. Under the terms of the CCA, a relationship may be deemed unfair to the

debtor due to one or more of the following:

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Any of the terms of the Agreement or related agreement.

 

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The way in which the creditor has exercised or enforced any of his

rights under the agreement or any related agreement.

 

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Anything done or not done by or on behalf of the creditor

26.The fact that a relationship may have ended would not preclude the court from

making such a determination. Once an unfair relationship claim has been

made, it is for the lender to prove the contrary. Remedies may include

repayment of any amount paid by the debtor, together with the reduction or

discharge of any sum payable by the debtor.

 

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27. The unfair relationships provisions have been drafted to provide the county

court considerable discretion when hearing a borrower’s case.

Fitness Test – section 25

28. The CCA 2006 introduced two concepts which have a bearing on responsible

lending. These are the consideration of credit competence and evidence of

irresponsible lending, which the OFT must consider when assessing whether

a lender is ‘fit’ to hold a consumer credit licence.

29. The OFT is currently preparing guidance on Irresponsible Lending, which will

be published in July. It will cover all stages of the credit cycle, including how

all lenders must assist borrowers in financial difficulties. The OFT has

suggested that the guidance will incorporate issues such as arrears handling,

sale and purchase of debts, use of repayment holidays, default charges, and

action on default including possession actions.

30. OFT officials have said that the FLA’s members will be well-placed to meet

the requirements of the guidance because of the forbearance arrangements

already set out in the FLA Lending Code.(See paragraphs 11 to 20 above)

Administration of Justice Acts 1970 and 1973

31. In the majority of arrears cases, second charge lenders and their borrowers

are able to agree alternative payment arrangements until normal repayments

can be resumed.

32. Section 36(1) of the Administration of Justice Act (AJA) allows a lender to

bring a possession action within two months of a borrower falling behind with

their repayments. But where possession action is the only route, this period is

in practice much longer due to the extensive forbearance measures adopted

by lenders. However, there may be cases where earlier action is required - for

example, where there is evidence of fraud.

33. The AJA provides considerable discretion to District Judges when considering

a possession case, allowing them to adjourn, stay or suspend orders for a

reasonable period.

34. The AJA, together with subsequent case law governing the possession

process, provides considerable consumer protection for borrowers in financial

difficulty.

Pre-Action Protocol for Mortgage Possession Actions

35. Second charge lenders also comply with the Pre-Action Protocol for

Mortgages, which was introduced by the Ministry of Justice in November

2008. The Protocol requires lenders and borrowers to act fairly and

reasonably with each other. It is aimed at encouraging more pre-action

contact between the parties to seek an agreement and to facilitate the

efficient use of the court’s time, where an agreement cannot be achieved.

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36. The Protocol recognises and complements the extensive forbearance action

already provided by second charge lenders to customers in arrears. It also

provides additional protection for homeowners. For example, under the

Protocol, a lender should consider postponing the possession action where:

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A claim has been made under a payment protection policy and this is

expected to be accepted by the insurer.

 

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The borrower can demonstrate that reasonable steps have been or will

be taken to market the property at an appropriate price and in

accordance with reasonable professional advice.

 

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A genuine complaint has been made to the Financial Ombudsman

Service about the potential possession claim.

37. Prior to the introduction of the Protocol, lenders may have sought a

suspended possession order from the court to reinforce an alternative

payment arrangement agreed with the borrower. Under the Protocol, they

will only be able to seek a possession order once all reasonable options

have been discussed with the borrower and these have failed to resolve

the position.

38. Together, these legislative remedies provide additional protection to

consumers facing possession action.

 

Government initiatives

39. The second charge mortgage market has been actively involved in

discussions with Government on a range of new initiatives aimed at

helping borrowers in arrears, including the Mortgage Rescue Scheme and

the Homeowner Mortgage Support Scheme. These complement the

forbearance measures adopted by lenders and provide assistance for

more vulnerable borrowers.

40. We strongly believe that Support for Mortgage Interest (SMI) should be

paid on all second charge mortgages, as well as first charge mortgages.

This omission presents a significant gap in consumer protection, which

could be addressed quickly and, as average balances are low, the cost to

Government would be commensurate with the protection provided. The

Government could also look to recoup its funding via a subsequent

charge over the property, which would be realised on sale.

Impact of the credit crunch on access to mortgage finance

41. The credit crunch has had a fundamental impact on the second charge

mortgage market and the severity of the impact is illustrated by the 90%

reduction in new business from £227 million in April 2008 to £22 million in

April 2009.

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42. Many second charge lenders depend on the wholesale funding market. These

specialist lenders have traditionally relied on finance from banks to originate

assets which were then warehoused, and securitised into the capital markets

via the issuance of highly-rated securities. The underlying assets have

continued to perform well in the market. But these markets have dried up,

leaving only a couple of lenders with very limited funding lines still providing

new loans in the market.

43. Government support is now essential and urgent. The Guarantee Scheme for

Asset Backed Securities to help support the availability of mortgage finance is

currently restricted to banks and building societies. The Crosby Review in

2008 concluded that guarantees on residential mortgage-backed securities

should be available to all lenders, including non-deposit takers.

44. The criteria for the Guarantee Scheme need to be amended to allow

securities backed by second charge mortgages to qualify. The underlying

assets in second charge mortgage securitisations have performed

successfully and this reflects the historically low levels of default in the

second charge market.

45. If these changes were made to the Guarantee Scheme for Asset Backed

Securities (ABS), the specialist non-bank lenders would be in a position to

resume new lending immediately. This would revive competition and

innovation in the market, help reduce credit prices and bring an end to the

current impasse. In our view, a full and sustained economic recovery will only

take place when the full spectrum of markets are being fully supported and

serviced.

1 July 2009