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‘Capitalising arrears masks true figures’

The FSA says lenders’ forbearance strategies are masking the true extent of the number of borrowers in arrears.

According to the regulator, there is an increasing trend for lenders to capitalise arrears, meaning that rather than treat arrears as separate outstanding payments, they are rolled into the total of the loan.

In some cases, arrears are being capitalised after just three months, with borrowers charged a lower payment rate and no recovery of past arrears.

The FSA is carrying out supervisory work on techniques such as capitalisation used by lenders as part of their forbearance strategies.

FSA mortgage policy man-ager Lynda Blackwell said last week: “Lenders are exercising forbearance strategies, which are helping to mask the true extent of the problems. We have seen lenders capitalising borrowers’ arrears at an increasingly rapid rate.”

An FSA spokeswoman says: “It is not a practice that is banned per se but lenders can use capitalisation to make the arrears picture slightly better, so you do not get a true reflection of how many people are in arrears. We are trying to make sure that the arrears cases are dealt with rather than making borrowers end up in more debt overall.”


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. In the pre-possession protocol capitalisation of arrears is one of the aspects a lender must consider in any event before embarking on possession proceedings.

    Better a debt increased slightly than the devastation repossession causes.

  2. The FSA want their cake and eat it.

    The prime issue must be for the borrower to have the best possible outcome.

    The danger of capitalisation is that the borrower pays off over the remaining term. The FSA assume that once capitalised the borrower will not overpay.

    If the lender doesn’t capitalise and the borrower can’t pay off the arrears quickly then the borrower is going to be stuck with that lender and a poor credit history for years to come.

    If the FSA is only concerned about reporting the position all they need to do is change their reporting structure to require lenders to detail how many cases and amounts they have capitalised in the quarterly returns. They could also ask for specific information on cases where capitalisation has taken place more than once.

    The FSA need to have a bit more customer perspective – they talk a good game about TCF but don’t always evidence it in their actions in their attempts to beat lenders around the head.

    The lender can’t win and the borrower may well end up suffering!

    FSA care to comment on this?

  3. Struggling to see what the story is here.

    Debt capitalisation has been a normal practice for decades, normally where a debtor has made 6 full contractual monthly payments.

    More debt capitalisation is the logical result of customers resuming payment on their mortgages.

    If the FSA thinks a lender’s behaving inappropriately, why don’t they take action with that lender, rather than smearing the whole industry?

  4. Is the FSA really helping people, or just there to obtain figures for their statistics? I mean, the FSA should not even ‘consider’ capitalisation is a way to ‘mask’ a mortgage debt. The economic climate today acknowledges the fact; anyone can fall into mortgage arrears – it is the most logical solution to capitalise, instead of leaving the built up arrears looming over the borrower. What if they can’t pay the arrears in full, or the borrower cannot maintain the high monthly arrears payments? Their home then is placed at risk, and if they lose it; the borrower will then have to pay any shortfall back to the lender after a repossession sale. What is the FSA thinking? Do they really want to destroy the country that way?

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