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Code comfort for CML

Panel Members: Mark Underhill, Product development manager, Yorkshire

Building Society; Michael Bolton, Head of lending, Birmingham Midshires;

Andrew Young,

Mortgage network director, Zurich IFA Group.

If, as some industry figures are predicting, statutory regulation prompts

lenders to leave the mortgage code next year, what do you think could

happen to the CML and the mortgage code?

Underhill: The implications for lenders of the proposed legislative

arrangements are considerable, given the costs of providing the required

information to prospective borrowers and ensuring intermediaries have

complied with the requirements.

For some lenders, these costs may be too great and so it is not surprising

that they may question whether to continue with a commitment to the

mortgage code. The CML has an important role to play as the representative

and discussion forum for lenders and this role will no doubt continue.

Bolton: From a regulatory point of view, I do not think it will pose any

big problems so long as statutory regulation does accommodate the mortgage

code which the industry has worked hard to develop.

I do see the CML continuing its role, albeit in a slightly altered form,

as the representative voice of our industry to the media, the Government

and regulatory bodies.

Young: First, I sincerely hope that lenders continue to support the

mortgage code. I believe that, in the absence of full statutory regulation

of mortgage advice, the only viable and workable option is for the code to

continue alongside FSA regulation, with the Mortgage Code Compliance Board

continuing to monitor and police all activities of the code. If some of the

major lenders in the UK were to withdraw from the code, it could destroy it

completely, reducing consumer protection and damaging the CML&#39s

credibility. It would probably take the mortgage industry back five years.

The CML is urging the FSA to ensure brokers in the sub-prime market are

closely monitored, with regular compliance visits. Is it fair that brokers

in this area should be singled out for special attention?

Underhill: It is interesting that the number of lenders in this area has

grown considerably. This has to be a reflection of the margin that can be

obtained, which can only be gained from the borrower. This in itself points

to the suggestion being correct although the level of work undertaken by

the intermediary needs recognition.

Sandiford: It is never fair that any one body or group is placed in the

limelight. However, this is simply a matter of investing in our future as

an industry and ensuring that we are not storing up trouble for the future

by turning a blind eye to any problems we might have. We all know the

sub-prime market has earned itself a bad reputation although, admittedly,

one that is not fully deserved. The image problem is down to us to sort out.

Lenders and brokers alike have to prove that sub-prime lending is no less

responsible than the mainstream market and that malpractice will not be

tolerated.

Young: No. Just because a mortgage broker operates in the sub-prime market

does not mean they are any less professional or ethical than those in the

full-status market. If the CML has concerns relating to fees and product

bias, then it should make this clear in the rules and ensure this is

covered on compliance visits.

I do not, however, believe such activities are rife among mortgage brokers

in the sub-prime market and do not believe they should be singled out for

special attention.

The FSA is proposing that lenders&#39 pre-sale disclosure documents should

carry a recommendation that borrowers should shop around and look at its

mortgage comparative tables before signing a contract. Is this a good idea?

Underhill: This probably represents a lack of understanding of how the

mortgage mar-

ket works. If the borrower has arranged the mortgage via an intermediary,

he or she wants the shopping around done for him or her. Borrowers who

approach lenders direct have usually done their own shopping around and the

end-result is the mortgage application and illustration. The proposal is

therefore not necessary.

Bolton: Any move to increase the transparency of the mortgage market is

undoubtedly a good thing for the borrower. It is part and parcel of a

market driven by choice and competition that is coming of age. The

industry needs to take collective responsibility for ensuring that suitable

regulation is in place to protect the lender, the broker and the borrower

from any confusion.

Disclosure is a process that is being recommended as this protection for

all parties and, although it will inevitably mean a cost burden, it can

only be a good thing in the long run.

Young: It is a daft idea. For one thing, most mortgage applications are

now introduced to lenders by mortgage advisers, who would have already done

the shopping around on behalf of the borrower. Second, I do not believe

mortgage comparative tables make it a clear-cut decision as to whether one

particular mortgage better suits a borrower&#39s needs than an alternative

one. Good quality face-to-face advice is what is needed.

Skipton has become the latest mainstream lender to enter the sub-prime

market. Do you think we will see all lenders offer a sub-prime range

eventually?

Underhill: Competition has increased and this, together with warnings on

the future direction of the economy, suggests there is not a lot of scope

for further entrants. The sale of a number of sub-prime lenders supports

this.

Sandiford: This is the question of the moment. If the rumour mill is to be

believed, we are set to see a few more mainstream lenders move into

sub-prime, either through acquisition or controlled growth. However, I am

not convinced the appetite will be there for all lenders unless there was a

proven demand from their existing customer base.

Don&#39t forget, it is still a very specialised market and demands an

approach which is directly opposed to the processes and systems that many

mainstream lenders currently have in place. There is a big difference

between dipping a toe in the water and choosing to become a specialist

lender.

Young: I am sure more mainstream lenders will enter the sub-prime market

because it makes so much sense. Offering a wider range of products that

satisfies a greater number of borrowers will help lenders grow their

mortgage books more quickly in a market that commands a wider profit margin

on pricing because of the higher risk element.

There may be an issue with brand reputation but, as Nationwide has done

with UCB and Halifax with Birmingham Midshires, the answer may be in

providing such loans via an alternative specialist lender in the group

under a different brand name.

There are two proposed trade bodies for brokers, the National Association

of Mortgage Brokers and Advisers and one being supported by three MCCB

board members. Which do you think shows the most promise at this stage or

should they pool resources?

Underhill: Resources should be pooled since it is pointless to have more

than one trade body representing the broking fraternity. This would

preclude any possible confusion from a consumer&#39s perspective.

Bolton: Clearly, intermediaries are considering how they will be

represented as a collective body in the light of forthcoming regulation. I

think it is too early to say what the end result will be at the moment.

However, we are certainly watching these developments with interest and

wish both bodies success for the future.

Young: As I understand it, Namba is the only current proposed trade body

for mortgage advisers but is not yet operational. There have been rumours

of an alternative trade body being formed but as yet I have heard nothing

from any such body. One thing is certain, a formal trade body is needed to

represent mortgage advisers more extensively than has been possible to date.

Following Bristol & West&#39s acquisition of Willis National, do you see many

other lenders snapping up distribution channels in the near future?

Underhill: This depends on the strategic choice of lenders. I cannot see

it being followed by many due to the high costs involved in initial

purchase and subsequent admin and regulatory requirements.

Bolton: Although I do not think there will be a wholesale movement of

lenders buying their own distribution channels, I do think we will see

a few more brokerages either being snapped up or lenders forging strategic

alliances with individual brokers.

For some, this will be the most cost-effective way of containing the cost

of further regulation. However, it is very much dependent on the individual

lender&#39s business model and business strategy.

We have already seen lenders such as Bradford & Bingley move towards

becoming a retail outlet for mortgages rather than a manu- facturer.

I think this is probably far more likely to be a growth area, particularly

as lenders look for ways to use the strength of their brand to diversify

away from core business, where margins are diminishing, and carve a niche

for themselves in an extremely com- petitive market.

Young: I am sure more lenders are likely to acquire their own distribution

channels as, quite clearly, in the UK mortgage market, distribution is

king. Although many major lenders have developed close working

relationships with big distribution organisations such as Allied Dunbar and

Legal & General, there is always an element of risk to such arrangements.

So, for some lenders, captive distribution could be the answer although

let us not forget that acquiring distribution in this way is not cheap.

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