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Specialists bring up the arrears

Mortgage brokers have been in the FSA’s firing line, with fines and bans being handed out for a variety of regulatory failings. Now specialist lenders are firmly in the regulator’s sights.

Last week the FSA released the findings of its latest review of arrears manage-ment by mortgage lenders and specialist lenders faced the wrath of the regulator as it listed a variety of failings.

It accused them of operating “a one size fits all” approach focused too strongly on recovering arrears without reference to borrowers’ circumstances.

The FSA also says that specialist lenders are too ready to take court action and have lower systems and controls to control mortgage arrears’ handling.

FSA figures show that the percentage of mortgage loans in arrears rose from 2.07 per cent to 2.44 per cent between the first quarter of 2007 and the first quarter this year. For securitised loans, the figures were 4.02 per cent in Q1 2007, rising to 4.47 per cent in Q1 2008.

In a separate review of responsible lending, the FSA revealed it is considering referring several lenders for enforcement action while others have been asked to undertake remedial work.

The FSA says it found some specialist lenders in particular were not checking income where they should have reason to doubt the amount declared.

The Intermediary Mort-gage Lenders’ Association says it “strongly contests” the FSA’s suggestion that specialist lenders operate such an approach to arrears management. It says it is not in lenders’ interests to reposs-ess in the current market as losses are crystallised.

Nationwide group exec-utive director Matthew Wyles says the last five to six years have been characterised by a “dash for growth” and lenders failed to develop their servicing and collection process as much as their front end business. “Some of that underinvestment will show up starkly,” says Wyles.

The Council of Mortgage Lenders says it is surprised at the FSA’s observations on specialist lenders, which it the CML believes have been working “extremely hard” to manage arrears.

It says the lending industry is making strenuous efforts to ensure that repossession is only taken as a last resort, when other realistic alternatives cannot be found that balance the interests of the borrower and the lender.

The CML is urging the regulator to work constructively with those lenders to ensure there is shared understanding and agreement about the FSA’s requirements.

It says: “The mortgage lending industry is making strenuous efforts to ensure that repossession is only taken as a last resort, when other realistic alternatives cannot be found that balance the interests of the borrower and the lender.”

Many specialist lenders outsource their servicing to Homeloan Management Limited. Sales and marketing director Mike Perry says the firm has no internal prob-lems in handling arrears.

Perry says problems are created within lenders when sales staff are transferred to the collection side of the business. He says: “Sales staff are not trained to deal with the emotional aspect that is involved in collection. We believe it is a completely different skill.”

London & Country mortgage specialist Richard Morea says the review shows that the FSA is prepared to “put its money where its mouth is” and fine lenders large sums for failings.

He says: “You have got to question why specialist lenders are falling so far short. The rules and regulations have been around for some time and I am surprised that some are just paying them lip service rather than getting in there and making sure they comply.”

But Hamptons managing director Jonathan Cornell says it is difficult for lenders that are facing high numbers of arrears to deal with each case on its own merits.

He says: “From the lender’s point of view, they have shareholders that they have to report to. They are running a business and they have to find a way of balancing the two aspects.

“There has to be a level of consumer responsibility. Brokers and lenders have to ensure their lending is responsible but there is a level of caveat emptor – people should not be loading themselves up with debt when they cannot afford it.”

A separate review into brokers conducted by the FSA, the second instalment of the regulator’s quality of advice review, found that little improvement has been made to improve the standards of advice being given to consumers.

The regulator looked again at 250 mortgage advice firms to identify where improvements have been made following the initial project last year, which found weaknesses in key areas of firms’ advice processes.

The FSA says the overall findings were disappointing and is telling firms they must “significantly improve methods of establishing affordability, including gathering better evidence to support their reasons for advice and doing more to take customers’ existing outgoings into account”.

As a result, seven small mortgage advisers were referred to enforcement and a further 23 are required to review customer files.

Beachcroft Regulatory consulting managing director Richard Hobbs says he is not overly surprised that the FSA’s review found mortgage advice processes to be lacking.

He says: “In the current economic climate, some advisers are finding it ever more difficult to keep their income up, so they are resorting to increasingly desperate measures in order to survive. That puts their compliance resources under even more strain.”

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