The FCA has criticised poor lending practices in the second charge market, including poor affordability checks and firms breaking key conduct rules.
The FCA made the statements in a ‘dear CEO’ open letter to all second charge lender executives today.
The letter follows the regulator’s review of second charge lenders, started last year and revealed by Money Marketing sister title Mortgage Strategy.
The FCA says it has found “significant concerns and found a number of poor practices” in its recent second charge lending review.
The regulator says it has found examples of firms breaking MCOB rules by “not basing lending decisions on income and expenditure assessments”.
Some firms were lending based only on equity, debt to income ratios or income multiples, for example.
However, the FCA says all firms it investigated were improving in this area.
The FCA says second charge affordability checks were often difficult to follow, especially with lending carried out outside lending policies.
The FCA adds that some firms’ shaky income and expenditure assessments led to customers with poor credit profiles being given second charge loans.
The regulator’s letter says: “Please consider whether your firm’s affordability calculation is now at the heart of each lending decision and that the calculation itself takes into due consideration the credit profile of an applicant.”
The regulator says income assessments for the employed were generally fine, but were riskier for the self-employed.
It says: “In some cases, we were unable to identify where an underwriter had obtained the figures used for net income.
“We also found evidence that lenders were not always taking account of tax and national insurance deductions and were relying on calculations contained within accountants’ certificates and other documents that did not appear to be plausible or realistic.”
The FCA adds that some second charge lenders’ documents checks were so weak they could not guarantee they were not enabling financial crime.
The letter says: “You should be aware that where the FCA identifies that a firm’s systems and controls have failed to such an extent that it is unable to protect itself from becoming a party to financial crime, we will consider taking action against the firm and its senior management.”
The regulator has asked second charge lenders to review their processes and confirm they are lending responsibly by 1 May.
Finance & Leasing Association head of consumer and mortgage finance Fiona Hoyle says: “The FCA’s Dear CEO letter acknowledges that firms have already taken action to improve affordability calculations and that some income assessments are working well – but it does also identify where further work is required, which will help firms to fully embed the new regime.
“The industry has been through a period of demanding regulatory change, having been given only nine months to implement the MCOB regime. This early insight into where additional change is required will assist firms prioritise their compliance work.”