The FCA is warning consumers of the risks of self certification mortgages after the launch of a new lender earlier this month.
The lender, selfcert.co.uk, is based in Prague and is passporting into the UK using the Electronic Commerce Directive.
Self-cert mortgages – known frequently as ‘liar loans’ because they do not require borrowers to prove their income – are banned under the terms of the Mortgage Market Review. The default rates on such loans were far higher than loans where income was verified.
The regulator says: “Previously, when consumers took out a self-certified mortgage they self-certified that the income stated in their mortgage application was true.
“Because of the harm caused to consumers in the past, this is no longer permitted in the UK and firms must check a customer can afford a mortgage, including verifying their income in every case.
“From 21 March 2016, all firms offering mortgages in the UK (including EEA firms) will have to comply with the Mortgage Credit Directive, which requires a thorough affordability assessment based on information that has been verified by the lender.”
However, the Mortgage Credit Directive is less strict on rules around creditworthiness and income verification.
The directive merely states that the borrower’s income must be “appropriately verified, including through reference to independently verifiable documentation when necessary”, whereas the MMR explicitly states “a firm must not accept self-certification of income”.
The FCA warns consumers taking out a mortgage from a lender not based in the UK lose their consumer protection rights, including use of the Financial Ombudsman Service.
The regulator says: “Firms providing online services from an establishment in an EEA state other than the UK under the ECD have to comply with the law of that state, rather than with UK regulatory law. If anything goes wrong, the responsibility is with the other EEA state’s authorities.
“Even if a regulated mortgage adviser in the UK recommends such a mortgage, you will not be able to get compensation from that adviser if it turns out you cannot afford the mortgage payments. This is because the adviser is not responsible for assessing affordability.”
The regulator is recommending consumers take advice from a regulated adviser before making a mortgage decision.
The FCA says consumers still considering using a non-UK mortgage lender should ask what protection they have if things go wrong.
It adds buyers should ask to see the mortgage terms and conditions, regulator contact details and information about fees and charges.