Update: FSA to protect borrowers from themselves

19th Oct 2009 13:48

City watchdog the Financial Services Authority (FSA) has unveiled a range of proposed changes to mortgage regulation designed to 'protect consumers more from themselves.'The headline-grabbing change proposed by the FSA is the scrapping of self-certification mortgages, with the regulatory body tacitly admitting that borrowers were only too willing to abuse these facilities. 'It seems unlikely that a lack of financial skills was behind the widespread overstating of income found in self-certification mortgage applications,' the FSA said.The FSA would like to see the responsibility for verifying affordability of a mortgage application ultimately residing with the lender, and has highlighted industry best practice on calculating free disposable income. Under the industry guidelines, the calculation of free disposable income would start with the gross income of the mortgage applicants and then subtract committed expenditure, then personal expenditure and then a discretionary amount for contingency expenditure.Examples of committed expenditure include income tax, national insurance, existing debt repayments, rent, council tax, pension contributions, alimony and maintenance payments.More controversially, the guidelines call for lenders to probe mortgage applicants on their personal expenditure, including how much they typically spend on food, drinks, alcohol, tobacco, dining out, clothing, household goods and services, transport and recreation.The contingent expenditure element of the calculation should make 'prudent allowance for any missed or understated expenses.'The proposals also set out to warn borrowers of the dangers of 'seeing property as an investment and an asset that can be used to fund day-to-day spending.'The FSA's research of houses sold at auction indicates 'that buy-to-let investors and borrowers who are over-indebted through an over reliance on credit to supplement their income, have been the main sources of the growth in mortgage repossessions so far.'Unfair charges on borrowers who are in arrears are also to be targeted by the FSA. The Authority will canvass opinions in January of next year on plans to abolish the continued application of monthly arrears administration charges where a consumer is adhering to an arrangement to repay arrears, and the charging of early redemption charges.'The proposals set out in this paper amount to a significant step-change in regulation. We are proposing to intervene much more directly to deliver the higher standards of lending and borrowing that we think are crucial to a sustainable market that works better for consumers,' the report said.