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Bad practice

Experts say DB Mortgages’ irresponsible lending was the side-effect of a market too willing to sacrifice standards for a bigger share. Paul Thomas reports

Industry experts believe the failings that led to the FSA fining DB Mortgages were endemic in the sub-prime market and a by-product of an over-aggressive desire for market share and lending volumes.

Intermediary-only DBM is the fourth lender to be referred to enforcement following the regulator’s thematic analysis on mortgage arrears handling but, significantly, the Deutsche Bank subsidiary is the first to enter enforcement due to irresponsible lending practices.

The FSA spotted a number of failings in DBM’s lending practices and the way it treated customers in arrears, which ultimately led to it receiving an £840,000 fine and a redress programme of around £1.5m.

Perhaps the most significant of all of the lender’s failings was the fact it failed to keep to its own lending policy.

DBM stated that where a customer contacted it for a self-certified mortgage but might have qualified for another product with a lower interest rate, the lower-rate product should have been offered. The FSA found that in a random sample of 53 cases, this did not happen in 32 – or 60 per cent – of them.

An industry source who wants to remain anonymous told Money Marketing this type of guarantee was not widespread and was possibly the main reason for the sanction.

The source says: “This is a policy that is specific to DBM – one it failed to implement and ultimately got sanctioned for. Other lenders, to my knowledge, would not have had this policy in place.”

DBM also failed to demonstrate, in five out of a sample of 25 interest-only cases, that it had checked the customer had a place to live if the repayment vehicle was through the sale of the borrower’s home. This happened despite it being part of the lender’s own lending policy. In a further 10 of the 25 cases, it was unclear if the information had been obtained from the customer.

The FSA found a number of other practices to be unsatisfactory, including the failure of DBM under-writing staff to check that customers under 60 would be able to afford their mortgages in retirement. This happened in eight of the 18 cases reviewed.

The lender was punished for levying unfair arrears charges on customers, which did not accurately reflect the administrative costs incurred. The FSA also found DBM had failed to take into account a person’s individual circumstances and did not communicate the full range of options available to customers.

Money Marketing approached Bill Dudgeon, managing director of DBM between January 2006 and January 2008, for his views on the FSA action but he says he is under a confidentiality agreement with Deutsche Bank that prevents him from commenting.

Bill Warren Compliance managing director Bill Warren says sub-prime lenders’ emphasis on market share ultimately led to a compromise in service standards.

He says: “It was well known they were chasing volume and not paying too much attention to quality. They were not totally reckless but their masters wanted volume, so they went for volume.

“If you are going to genuinely quality check your lending, you are not going to get that sort of volume. You had more and more sub-prime lenders coming in wanting ’x’ market share, and they would adjust their criteria accordingly.”

Email Mortgages chief executive Michael White believes some sub-prime lenders thought any risk would be counterbalanced by rising house prices.

He says: “I know there were several lenders who decided the only way was up in the market. Therefore, even if you took a huge risk on assets, the risk was ultimately mitigated by the increasing value over time.”

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