Financial Conduct Authority –Guidance on dealing fairly with interest-only mortgage customers
The FCA Guidance is primarily aimed at residential mortgage lenders and third-party administrators and relates to the “back book” of existing residential interest-only mortgages. In essence, the FCA Guidance sets out what the FCA expect firms to do in order to ensure that their customers are treated fairly when faced with an inability to repay the capital sum due on their mortgage at the end of the mortgage term.
The FCA Guidance
Customers remain responsible for repaying their mortgages and that repayment of the capital sum due at the end of the mortgage term is a contractual requirement. While lenders are not obliged to offer options to their customers in relation to repayment of their loans at maturity, they “must pay due regard to the interests of its customers and treat them fairly” by acting in accordance with Principle 6 of the FCA’s Principles for Business.
To act in line with Principle 6, lenders are encouraged to take action to minimise the risk of non-repayment through early and effective engagement with their customers throughout the mortgage term. The FCA Guidance focuses on what lenders are expected to do in terms of governance and communications with their customers.
In relation to governance, the FCA expects firms to:
- have a written strategy, setting out the firm’s policy and procedural framework for managing loans that may not be repaid in full at the end of the contractual term;
- consider what options can be offered to interest-only customers, either during the contractual term or at maturity, including setting out the reasons why certain options are or are not offered;
- provide sufficient procedural training, monitoring and guidance to front-line staff on how to execute the firm’s policy so to ensure consistent and fair outcomes to interest-only customers;
- collate enough management information to enable the firm to monitor its interest only back book and review the performance of any mitigation actions taken during the contractual term or after maturity;
In relation to the steps which firms should take in order to protect their customers, the FCA expects firms to:
- communicate with customers early and frequently, prioritising high risk customers and those reaching the end of their contractual term, as well as ensuring any options agreed with a customer are followed up in writing;
- provide customers with enough time to consider the maturity options being offered to them (particularly if the firm’s range of options is limited or if customers must meet specific criteria to be eligible), thereby taking into account how much time customers have to take action and ensuring that any options available at maturity are clearly communicated to the customer;
- assess the affordability of any variation to the mortgage terms where monthly payments are materially increased or where the term of the loan is to be extended into a customer’s retirement;
- consider the treatment of customers who are unable to change their mortgage provider or vary the terms of their existing mortgage and be able to show that the firm has complied with Principle 6 of the FCA’s Principles for Business (for example, a firm should not unfairly charge such “trapped” customers a higher rate of interest than other customers to exploit the fact that they are unable to exit the mortgage);
- only exercise a unilateral right in favour of the firm under the contractual terms of the mortgage documentation to change the mortgage from an interest-only to a capital repayment mortgage once reasonable steps have been taken to contact and agree this action with the customer and, further, to consider whether the customer can afford any increased payments; and
- in accordance with Principle 6 of the FCA’s Principles for Business, proceed with repossession action as a last resort and only once a customer’s circumstances have been assessed and all available options which a firm is able to offer have been considered.
The recommendations set out in the FCA Guidance highlight that lenders must continue to treat their interest-only mortgage customers fairly and not exploit those who are in difficulty.
The FCA has stated that it expects almost half of those homeowners whose interest-only mortgages are due to mature over the next 30 years to have a shortfall when their loan matures and therefore lenders need to adapt their policies, so as to implement the recommendations set out in the FCA Guidance.
Implementation of the Mortgage Market Review
The Mortgage Market Review (“MMR”) will be implemented on 26 April 2014.
Aimed at ensuring risky lending practices do not return, the rules strengthen responsible lending requirements, with lenders being required to check that a borrower can afford the mortgage they are taking out now and in the future (given that interest rates may rise) and have a credible way of repaying interest only mortgages at the end of the term.
For further details on any of the issues covered in this blog please contact Angela Stallard, Partner in Corporate and Commercial on 020 7583 2222.