Lawyers say self-cert mortgages will be banned under European law from 21 March, despite protests from the founder of a controversial new self-cert lender.
The Mortgage Market Review put a stop to self-cert loans in the UK in April 2015. But in late 2015 selfcert.co.uk set up in Prague to operate in the UK by using the Ecommerce Directive. The Czech Republic currently has no creditworthiness rules for lenders.
This month the Mortgage Credit Directive will be implemented across Europe, forcing lenders to judge creditworthiness by using information that is “appropriately verified, including through reference to independently verifiable documentation where necessary”.
The FCA says the MCD is at odds with the self-cert business model.
In January the FCA said: “From 21 March 2016, all firms offering mortgages in the UK (including EEA firms) will have to comply with the MCD, which requires a thorough affordability assessment based on information that has been verified by the lender.”
But Selfcert.co.uk founder Graeme Wingate claimed his lender can exist under the MCD and the European Banking Authority’s creditworthiness guidelines.
He said: “There’s nothing in those rules. The wording they use is ‘creditors should make reasonable enquiries and take reasonable steps to verify consumers’ underlying income’. It’s very, very vague – there’s nothing in it. We’ve had legal counsel and legal experts on it and they’ve said there’s nothing there. It’s unenforceable.”
Wingate says selfcert.co.uk uses social media and credit checks to judge income.
However, lawyers say the current self-cert business model is incompatible with the MCD.
Henderson Chambers barrister Henry Warwick says the MCD wording must be open to allow EU countries to mesh the MCD into existing rules, but adds: “It’s pretty clear in saying there has to be a thorough assessment of creditworthiness.
“I can’t imagine how it would be the case that a purely self-certified mortgage application would meet the requirements for a thorough assessment.”
Edwin Coe real estate consultant Robert McNally says the MCD will force lenders to actively prove a borrower’s creditworthiness.
He says: “That means they have to be able to prove it is affordable to the borrower. Affordability is potentially subjective, but it is a function of how much you’ve got going in and how much you’ve got going out. So how does the creditor know that information? He must have asked for it.”
Pinsent Masons financial services regulatory lawyer Chris Davidson says: “[Under the MCD] you have to carry out a thorough assessment of the consumers’ creditworthiness and his ability to meet his obligations under the agreement.
“You have to look at external factors, you can’t just take the word of the borrower. You have to validate it and verify it.”
Martin Stewart, director, London Money
Self-certification has gone the same way as Ratners. Once you have that reputational damage you are not going to get that back again. There is clearly a need for something here, but not for self-cert. There is a need for a different approach to underwriting for certain classes of borrower. But have the banks got the appetite for that? I do not think they have. Banks do not want to take anything that is non-vanilla.