The Mortgage Code Compliance Board is becoming inc-reasingly concerned that some brokers are intent on breaching Consumer Credit Act rules to line their own pockets.
After revealing last week that nearly 40 per cent of borrower complaints last year concerned the failure of brokers to refund fees, the regulator issued a warning that such breaches will be reported to the Office of Fair Trading.
It is the first time that the MCCB has felt compelled to threaten brokers with this measure but it is by no means the first time it has been confronted with the problem.
Less than a year ago, the MCCB, along with the OFT, issued comprehensive guidance to brokers to “remind” them of their statutory obligations under the CCA in what was a clear bid to stamp out the worst of these practices.
But judging by the number of complaints that the MCCB has had in this area since, the question is whether both regulators are capable of putting an end to what has become a major blot on the copybook of the mortgage market.
There is mounting evidence to suggest that they may have a real struggle on their hands. As the MCCB points out, brokers are becoming ever more sophisticated in their methods of avoiding their statutory obligation to refund fees.
It cites a number of areas of particular concern, where brokers have gone so far as to produce their own documentation stating that fees will not be refunded if a mortgage fails to complete within six months.
While this is clearly in direct contravention of section 155 of the CCA, which outlaws the charging of advance non-refundable fees, there are other ways in which brokers are seeking to muddy regulatory waters.
According to the MCCB, a popular method is for brokers to set up an in-house packaging firm to take advantage of a clause in the CCA which states that third parties can keep advance fees if they were involved in a mortgage application. However, the clause is only intended to apply to third parties unconnected to the broker when, of course, most of these packagers are owned by the intermediary firm.
It is not only the MCCB and OFT which frown upon this practice. London & Country mortgage specialist David Hollingworth says: “This type of thing is outrageous and totally against the spirit of the mortgage code and CCA. Att-empts to create loopholes in regulation are cropping up far too frequently and only serve to give mortgage brokers a bad name. The MCCB and OFT must have the tools to crack down on these people.”
In fact, the MCCB is able to impose sanctions against non-compliant brokers, as subscribers to the mortgage code must ensure they comply with all relevant laws and regulations, including the CCA, yet it is reluctant to do so.
Before its pledge last week to report all brokers contravening the CCA to the OFT, the MCCB dealt with these types of cases by simply issuing a warning. It admits it rarely invoked disciplinary action. But under the new procedures, its sole function is to provide the OFT with the case details of rogue brokers, only using its powers to expel an intermediary from the mortgage code under the most serious of circumstances. So, the buck has now passed to the OFT, which, to a certain extent, makes perfect sense as it has responsibility for enforcing the CCA. But it is questionable as to whether this marks a step forward because, as the OFT admits, it is hamstrung by the act it polices.
Under current CCA rules, a broker refusing to refund fees can either be issued a warning by the OFT or have its credit licence taken away. With no other sanctions available to it, the regulator admits to erring on the side of caution, generally settling for a warning. It has only once withdrawn a credit license under these circumstances.
OFT acting head of news Mark Kram says: “It is a difficult situation. We do recognise that we only have one sanction we can impose – a very strong one – and there is really nothing in between that and a warning. But the whole of the CCA is under review and it may lead to some changes.”
The Department of Trade & Industry review of the CCA may in fact turn out to be of great benefit to the regulators and the borrowers they seek to protect. Not only does the OFT hope to be given extra sanctions with which to combat rogue brokers but, perhaps more importantly, the review may scrap a section of the CCA banning brokers from charging more than £5 if a mortgage application is rejected by a lender.
Pretty Technical Partnership partner Kim North says: “There is no doubt that the £5 limit is absolutely ludicrous compensation for brokers who often spend hours with clients only to see the mortgage rej-ected for any number of reasons. If the DTI does abolish or raise the limit, as it should, I think we will see the number of brokers failing to refund fees fall significantly.”
As it stands, the mortgage market has two regulators which are either unwilling or unable to clamp down definitively on brokers abusing CCA rules. It amounts to a rather bleak outlook for borrowers but the DTI could yet do them – the MCCB and OFT and brokers who comply with the code – a huge favour by taking away a major reason why some brokers continue to rip off clients.