This is the first time the FSA has fined a mortgage lender in relation to its lending processes.
The FSA says this action sends a clear signal that lenders’ management must treat all their customers fairly and prevent them suffering detriment.
The news follows concerns raised by housing minister Caroline Flint at this
week’s Labour conference, on the number of second charge repossessions
initiated by GE Money. For the full story see this week’s Money Marketing.
The regulator revealed that the customers affected were those whose mortgage contracts were subject to a retention clause, where a sum of around £3,000 was withheld from the mortgage advance – typically where the borrower was required to carry out specified repairs to the mortgaged property.
The firm’s mortgage terms and conditions provided that these retention monies would be retained for six months and that during this time the borrower would be charged interest on the full mortgage loan including the retention monies. After six months the retention monies and accumulated interest should have been released to the borrower or applied to reduce the outstanding mortgage loan.
The firm’s terms and conditions did not make it clear to all customers that they would be charged interest on the full mortgage loan, including the retention monies, during the six month retention period. The FSA has also revealed that due to inadequate systems and procedures at the firm, retention monies and accumulated interest were not always paid to borrowers or applied to their outstanding mortgage loan after six months and the firm continued to charge some borrowers interest on retention monies beyond the six month retention period.
When a mortgage with an outstanding retention was redeemed, the firm did not always deduct the retention monies and accumulated interest from the outstanding mortgage loan. This resulted in some borrowers overpaying the firm when redeeming their mortgage.
FSA director of enforcement Margaret Cole says: “The firm’s failings were serious because a large number of borrowers, including some with impaired or non-standard credit profiles, were put at risk of financial loss. The firm identified the systems and control failings in 2004, but despite internal recommendations that improvements be made, no corrective action was taken for more than two years.
“I emphasise that we expect high standards by lenders in their administration of their mortgage book.”
As a result, the regulator has ensured that customers who suffered financial loss as a result of the retentions failings were properly compensated.
GE Money says it has commission an external review of the issue and will share the report with the FSA. It says it also has stopped using the retentions mechanism.
Because GE Money agreed to settle an early stage of the proceedings, it had a 30 per cent reduction in the FSA penalty. The FSA says if it were not for this, it would have fined GE Money £1.6m.
In total, including both regulated and non-regulated mortgage contracts, GE Money has paid 5,245 customers redress of £7.04 million in relation to their mortgage retentions.
GE Money Home Lending chief executive Colin Shave says: “We regret the events which led to this situation and, although the number of affected borrowers was small compared to our overall customer base, we sincerely apologise to those who were affected.
“Since we reported the problem to the FSA, we have worked hard to ensure that customers affected have been fully refunded and compensated. Our customers can be assured that we have taken this matter extremely seriously and have thoroughly reviewed our systems and processes to ensure this could not happen again.”