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Alan Lakey: Responsible lending lacks logic

Have the deranged really assumed control of our financial services asylum? I ask, not out of some metaphysical or philosophical bent or by reason of paranoia stalking my every step but because of the consequences of the buzz-phrase of choice, ‘consumer detriment’.

Sir Howard Davis and his successors used the consumer detriment argument to remove the longstop, to instigate numerous retrospective reviews and also kickstart the RDR. Clearly it is a powerful tool which journalists, politicians and rabble rousers habitually use to influence policy and rewrite the rulebooks.

Of course, consumer detriment comes in all shapes and sizes. We have the misselling sagas and the deceptions that create both real and imaginary torment, such as the CMCs and their PPI trickery. We have a building society that uses its high-volume muscle to negotiate such high commissions that their customers pay 27 per cent more than through other channels. We have a regulator that, well, we all know that story, and then we have the Abbey.

Now if the Abbey took on human form it would quickly be captured and confined for its own good.

Stupidity forms an everyday part of the industry but Abbey has transformed it into an art form, a ballet of absurdity where the dancers are deprived of stability and the choreographer is both blind and unhinged.

Much of this insanity stems from another groovy sound bite that is gaining regular usage, that of the ‘responsible lender’ a term, which like consumer detriment, allows the user access to all manner of half-witted initiatives that would swiftly disappear if placed under the microscope of commonsense.

Abbey considers it is being responsible with its interest only loan criteria and outwardly such diligence should be commended, after all Martin Wheatley informed us that consumers behave irrationally and Abbey is surely there to save them from themselves.

Should lenders be allowed to impose nonsensical terms and conditions which are then explained away as ‘responsible lending’?

The question for the FSA to consider is at what point does inflexibility shift from reasonable to needless. At what stage does it create unwarranted consumer deficit?

Abbey recently denied the use of a £73,000 investment portfolio to repay £52,000 of interest-only borrowing. Its rules deny the use of investments made within the last year. Furthermore, its rules do not allow for any future growth, not even 1 per cent p.a. As £23,000 was invested in April 2012 so the full £73,000 cannot be used to repay this 21 year loan.

Lunacy, I hear most of you say. Well, consider this; Abbey is happy to allow the self same borrower to proceed as long as he signs a letter stating that he will sell his property when the mortgage ends in 2033.

To clarify, a loan with no repayment vehicle is acceptable as long as the consumer signs a letter confirming his irrationality but a loan where the consumer wishes to exercise logic and use investments some 40 per cent higher than the mortgage amount is unacceptable. Perhaps Martin Wheatley had Abbey in mind when speaking about irrationality?

To Abbey, and any other lenders who feel it appropriate to apply unbending rigidity in the name of responsibility, I remind them of Seth Hoffmans acute observation that “Rules are just helpful guidelines for stupid people who can’t make up their own minds.”

Alan Lakey is partner at Highclere Financial Services

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Comments

There are 26 comments at the moment, we would love to hear your opinion too.

  1. Maybe you should start a Mortgage Lending Business Alan?

    If you had £10 million you would just lend out, not to bothered?

    You miss the point by a mile – It’s not the FSA, since when have mortgage lenders listened to them?

    It’s about risk, risk to Santanders Mortgage book.

    < < Should lenders be allowed to impose nonsensical terms and conditions which are then explained away as ‘responsible lending’? >>

    Of course they should, it’s there money at risk- not yours.

  2. Hi Richard. I must admit it never entered my head that these nonsensical practices would find a defender.

    If I did run a lending operation it would use logic to dictate risk and not mindless obdeiance to the fears and phobias of an anal compliance officer.

    Are you actually saying that lending £52,000 over 21 years to somebody with a long-term investment portfolio of £73,000 is risky?

  3. Richard

    Perhaps you would be so kind as to define your interpretation of risk ?

    It would be fascinating !

    In this case, loan must be less than 75% to qualify for I/O in the first place and client has specific proveable means of repaying debt without requirements of capital growth of 140% of amount required.

    Risk to Abbey’s mortgage book my proverbial a+se. Next you’ll be justifying BASE + 9 because its 1.5 times basic salary !!!

  4. It doesn’t matter what I think, or what you think. It’s there money to lend under whatever terms they see fit. And charge whatever they see fit.

    Why is somebody with £73k taking out a mortgage in the first place? My advice would be to use the capital.

    Do I think it’s risky? I’ve never heard you can borrow money against liquid asserts? Of course it’s a risk, they could take the money out and go to Las Vegas.

    The mortgage market has been a complete joke, sign here and you get 300k. No checks. BTL for housewives, self certs, 125% FTB.

    Lets not forget this whole mess was caused by toxic mortgage books, full of self certs and unchecked ability to pay.

    The bottom line is its depositors money they are lending, and if they put safe guards in to prevent losses / so be it. No matter how stupid brokers think they are.

  5. Some logic would be very nice but let’s start with some balance!

  6. Richard,

    Please read this and digest before any more posts….
    http://www.better-english.com/easier/theyre.htm

    Thanks.

  7. The only thing I can see here is a lack of logic on part of the author who seems to make a sweeping statement yet uses one case from one lender to justify this. I don’t get this?

  8. @Richard Bishop. The lobotomy hasn’t worked. You seem qualified to be a Santander rulemaker – in fact your draconian views would effectively end lending.

    You seem to forget that we are talking about adults. People allowed to vote and drive cars. You also seem to miss the point that lending is about risk assessment.

    The case in question is a loan of £105 on a value of £450,000 with £52,000 on interest only. Of cousre the client can spend the money in Vegas, he might even agree to pay for your surgery but that’s not the point.

    Low risk lending with minimal risk of the Abbey losing any money.

    Let me also add that the toxic lending that caused the FSA to slam the stable door occurred in the USA, not over here.

  9. I love to read Alan’s tales. Even before I read it I know that Alan’s rants will make me laugh. Obviously I’ll not take anything he says seriously.

    I pity his clients, and wonder if sprouting this kind of thing will put him at the top of the list for any FSA visits. If I was FSA I’d like a good long look at his client files as it would appear that the best interests of the customer are not Alan’s primary concern?

    As Richard says, MCOB 11 is not the issue here, the issue is that decent building societies will look at the risk factors and ability to repay. We are not privy to the fact find in this case, (Alan, you did do one? yes?!), but why would a society want to lend on this basis?

    I.O should be only for specific reasons, and the broker wanting his proc fee from the mortgage sale AND ongoing trail commission from the investments should not the a factor in this!

    As my old boss used to say: ‘we are a lender, not a landlord’……

  10. If the argument is that clients can act in any way that they feel appropriate (either sensibly or otherwise) then so can a lender. One example of a lender acting stupidly does not mean that all lenders do so in exactly the same way that one irrational client does not mean that all clients act that way.

    I would also like to point out that whilst people can get carried away on these discussion boards, I do wish that personal insults were kept out of it.

  11. You don’t get it do you – It’s not down to you, to decide how other companies lend money and to whom and on what terms.

    I’m not making any rules for Santander, thats my point. If they want all borrowers to wear a straw hat and smoke a pipe before lending – thats up to them.

    Mortgage brokers bleating about what a tough market it is, how stupid lenders are.

    Wasn’t it great when we just got them to sign a form with no checks.

    This is the same company thats just banned a leading mortgage network from submitting business on their fast track.

    Maybe it’s just mortgage broker cases their being funny about. I would be.

  12. @Dathan Steele.

    Glad I brighten your obviously dull days. Maybe I am missing the point, maybe I should shut up shop but…last I knew the lenders allowed investments (endowments & ISAs, primarily) as a valid mortgage repayment mechanism.

    My point, which some seem to have purposely missed, is that LOGIC and RATIONALITY has left the Abbey building and, sadly, not just them.

    Why would a 13 month old investment be allowable but an eleven and a half month investment be deemed unsuitable?

    Why would any rational human believe that £73,000 of existing investments will not grow over a 21 year period?

    Why is a borrowers promise to repay the I/O portion of the loan from the eventual sale of his house a more robust method?

    I might add that your pathetic swipe re proc fee and trail is risible.

  13. I’m with Richard and Dathan all the way here. Nice to see a bit of balance for once.

    The decision entirely rests with the party that is risking their cash. If you don’t like it – go elsewhere.

  14. Dathan (is that really your name)

    You’re funnier than Alan !!

    By the way, Abbey are a Bank now !

  15. I’m familiar with abbey interest only criteria and they would only accept the application from the client on a ‘sale of property’ basis because there is a minimum of £100k equity in the property. Again pretty standard risk based lending – I cant see the issue with it myself. Bit of a non story in my humble opinion.

  16. @Ken – I agree no need for personal insults.

    @marty – Agree. Its a free market

  17. …and so basically 100k beats 73k! If the client had 73k equity in the property then they would not be able to proceed on the ‘sale of property’ basis either.
    A line has to be drawn everywere and it would seem in this instance the line is 100k.

  18. This is ridiculous! Alan as always you make brave points and RB says that it is up to the lenders! Sadly that is no longer the case. The lenders are now governed by the regulator. It is the regulator that makes the decisions – commercial or not!

    When I started in banking it was well known….and has not changed that default on mortgage came about because of personal circumstances(for those too stupid to work it out: divorce) not bad lending practice. But….you know the rest!!! Or it seems some of you buy the regulator bullshit!!!

    Alan what we have and I think you allude to, is a form of dictatorship- they are beyond even government control…we have seen it time and time again e.g. no long stop on complaints:this is beyond human rights! Why are we, unlike any other business so persecuted?

  19. Alan, my dear chap this is the height of logical sophistication when compared to Accord Mortgages.

    Just cast your eye over this:

    After making an on line application (which I normally try to avoid but the client requested the remortgage on a Wednesday and the deal expired on Friday). The amount of supplementary questions; repeated innumerably because they are computer generated and there seems to be a shortage of brain cells in the underwriting department who evidently employ redundant traffic wardens who can only work by blindly ticking boxes.

    This email extract will shed some light on a very dark corner.

    This was sent today:
    “I refer to an earlier conversation and attach the Amex credit card statement for £24.00
    I also attach (under)a previous e-mail on the topic. I find it almost beyond belief that you need this information for a client with (at your own valuation) a house worth £1.75 million who requires a £370k mortgage (21.5% LTV). And who has an investment portfolio worth some £300k, with a joint annual income of £174k.

    Sent: 24 October 2012 12:22
    It seems that you are serious in asking for a statement for American Express (which as far as I can see was on the bank statement 28th August for £24. Or are you referring to something else? This refers to the American Express annual charge. The client has the card but doesn’t use it. Do you really want the statement showing this??

    This is but one example of the fatuous questions and innumerable answers that have taken place over the past week. If I charged on a time basis the clients would be in for a bill of humungous proportions. And it would be no fault of theirs.

    Conclusion – if you are thinking of dealing with Accord Mortgages, go and lie down in a dark room with a cold towel and a bottle of Scotch and wait till the feeling passes. (Unless of course you enjoy wasting time).

  20. Integrity needs no rules…

  21. Sorry Mr Katz(you are usually on the boil) and all the others above. You don’t get it; it is not the lenders making the criteria but the regulator! Done as Alan points out in his article: “consumer detriment” or some other regulatory speak catch word! Lenders are asa frightened as we are! IT IS Control!!!

  22. @ Alan

    The point here is why take risk if you don’t need to? Cash in some of the investments, buy the house. NO risk re the property.

    Why do anything else?

    We are currently seeing I.O nightmare scenarios coming hone to roost. Householders who have been sold I.O and come the end of the term they have no method of repayment……so, at retirement they will be forced out of their homes. The lenders want their money back. This is the reality.

    To my mind FSA should have ‘grown a set’ years ago and banned I.O sales without a good reason. In the case we are discussing there is no reason, apart from the client wanting to gamble on the market. Maybe, just maybe this client does have the necessary risk tolerance to do this, but I’ve worked with a lot of speculators and gamblers over the years and they would not risk their PPR on a bet.

  23. What I find so frustrating in such cases is that you can’t get past the single digit IQ drone on the front desk to talk to a decision maker.

    I encountered a similar situation with an insurance company some time back. The dork I was dealing with couldn’t explain the logic of the rule in question and refused point blank to put me through to somebody who might have been able to and possibly, under the circumstances of that particular case, take a reasoned view and relax it. Discretion seems to have gone out the window and, as has been suggested earlier, it seems that everything that providers do is now dictated (and restricted) by the regulator.

    The pendulum has swung too far away from allowing providers to do pretty much whatever they please to making it impossible now to deviate from a rigidly inflexible set of tick box criteria and to make reasonable commercial judgements based on the merits of each particular case. Perhaps a classic example of excessive regulation stifling, if not innovation, then certainly reasonable commercial logic.

  24. To Clarify – I accept that lenders make the ruoles. Just like they have to accept that I will take my business elsewhere if their stupidity exceeds 3 on the Imbecility Scale.

    If I/O is banned then we can do nothing – accepted. If I/O exists then the logic…or lack of must be scrutinised.

    Whilst Dathan has extreme views regarding I/O let us not lose sight of the fact that it is a perfectly legitimate method of repaying a mortgage. One that the lenders milked for two decades when endowments were in favour.

    Why should a borrowers encash his investments to reduce his loan size? If he is paying 3.19% fixed for 5 years is it not a reasonable expectation that a growth portfolio will exceed this? Is it not sensible to be able to liquidate the investments if required?

    The trend within financial services – whether it be by the regulator, the lender, the OFT, Which? or whoever is to nanny everybody on the basis that we are too stupid to be trusted when the reality is that regulation has forced this parental attitude on the industry to the point where choice is being eroded and day to day decisions are being removed from our diminishing menus.

  25. @ Alan. So, my old school Building Society views on I.O are ‘extreme views’ are they? Well, pardon me.

    You might have heard in passing of the Mortgage Market Review? Well, looks like FSA have decided to shut the stable door long, long after the horse has been made into glue…..

    ‘The interest-only rules: the lender must also assess affordability on a capital and
    interest basis, unless there is a clearly understood and believable alternative source
    of capital repayment.’

    So, its the LENDER who will need to assess affordability, not the broker. ‘Clearly understood and believable…..’

    So Alan, what this means is that lenders will be forced to only give loans to people who can afford to pay them back. A shocking and radical concept indeed!

    My old CF10 at the Building Society: ‘We are a lender, not a landlord’. Perfectly understandable, but to make it clear we did not want to rent houses to people, we wanted them to buy the properties. i.e. at the end of the term they would have paid all the loan back and would own the house outright.

    Sounds very radical to me.

  26. I am guessing that those quoting the rulebooks and semi-defending Abbey do not deal with them on a day to day basis and probably haven’t worked at the ‘coalface’ on mortgages since before the crash?

    I would also suggest they also don’t have clients who have sufferred detriment and have certainly been treated unfairly by Abbey’s crazy box ticking exercises.

    I have at least half a dozen clients who would happily complain about this very thing. I’m not talking about high risk transactions where the relevant information was not provided (I know all about risk, I was an underwriter for Nationwide for 6 years in a previous life) , I am talking about clients in scenarios where they were easily placed with various other lenders, albeit at slightly higher rates.

    Nobody is saying we should not assess risk here, just that a little common sense, If anyone wants examples of this, ask me and I can provide.

    Abbey For Intermediaries are regularly not Treating Customers Fairly, whether that be the broker and/or the client themselves. I’d happily testify to that!

    Needed to be said Alan.

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