Government Expert Group on Mortgage Credit (GEGMC) Questionnaire -
A joint response for the UK by HM Treasury and the Financial Services
Authority
Introduction
The UK welcomes the opportunity to contribute to the Commission’s ongoing
work on mortgage credit through this questionnaire. The UK supports the
Commission’s ongoing work on market-led initiatives aimed at enhancing
lenders’ market access and increasing competition, and strongly supports the
Commission’s commitment to better regulation principles, as set out in the
White Paper. Improving the evidence base, and producing full cost benefit
analysis are critical for the success of any specific targeted proposal.
UK approach to the Commission’s work on mortgages
The UK welcomes the work that the Commission has undertaken to examine
the barriers to further European integration in mortgage credit markets.
Increased efficiency and competitiveness in these markets have the potential
to contribute to the overall growth of the EU economy.
In order to achieve these goals, the UK strongly believes that the Commission
should focus its future work according to the following priorities:
· alternatives to regulation. Non-legislative action, including work on
the mortgage code of conduct and market-led initiatives to increase
competition, should be fully explored before any decision is made on
legislation;
· better regulation. The UK strongly supports the Commission’s
commitment to better regulation principles. It is critical that any specific
proposal is accompanied by full cost benefit analysis; and
· market-appropriate regulation. The UK recognises that the Expert
Group’s concerns regarding US mortgage markets form the
background to the questionnaire, but believes it is important to stress
that there are many significant differences between the US and EU
mortgage markets.
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Mortgage market integration
All evidence suggests that the strong preference of consumers is to shop for
mortgages within, rather than across, national markets, and this is unlikely to
change. This suggests that EU mortgage market integration will not be driven
by demand-side changes.
Integration in European mortgage markets will be driven, indeed, is already
being driven, by the behaviour of firms which are willing to enter new markets
and add to the choice and competition within them.
UK firms report that, if they wish to enter new markets, they prefer to do so by
establishing a physical presence in that market rather than by cross-border
trade. They do not regard differences in national consumer protection regimes
as a significant barrier to market access. For these reasons, the UK does not
believe that action to standardise consumer protection legislation will further
market integration.
The Commission should focus on the promotion of the voluntary mortgage
code of conduct, rather than harmonisation of consumer protection legislation
across Member States. Harmonising consumer protection is not likely to
promote the further integration of EU mortgage markets. Moreover, the UK’s
recent experience of introducing mortgage regulation is that creating or
changing advice and information disclosure regimes carries significant costs
so should not be undertaken without a strong expectation of substantial
benefits. The emphasis should therefore be on respecting existing national
arrangements for consumer protection.
UK stakeholder involvement
In developing the UK’s approach the Treasury and the FSA have spoken to a
wide range of stakeholders, including lenders, intermediaries, consumer
advocates, and capital market participants.
A number of UK mortgage lenders are active in other European markets,
some in several. The experience of these lenders is especially helpful in
framing our approach.
Context
The UK notes the Commission’s conclusion that the US is facing problems
resulting from the way in which sub-prime mortgages have been sold.
However, there are many differences between US and EU mortgage markets,
including:
· the types of product;
· the way in which products are sold;
· the organisations active in the markets; and
· the processes which guide these organisations.
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The specific problems arising from mis-selling of sub-prime mortgages in the
US have not been seen in the EU.
National regulation
In 2004 the UK Government extended the scope of Financial Service
Authority (FSA) regulation to cover first charge residential mortgages. This
response refers to the FSA’s regime as it covers the great majority of secured
lending in the UK. There are some differences in the regulation of second
and subsequent charge lending which is treated separately by other UK
legislation.
Answers to the specific questions below outline issues on which the FSA have
intervened. In these instances, action was taken to deal with specific
individual firms, within the bounds of existing national regulation, to address
national market issues. The UK continues to believe that the case has not
been made for EU-wide legislation, and that the benefits of any attempts to
create such a regime are unlikely to outweigh the costs. Moreover, the
imposition of any harmonised regulatory regime may limit competition,
constrain product innovation, restrict consumer choice and so harm
consumers by reducing the availability of appropriate products.
This response presents the joint view of HM Treasury and the FSA. The
questionnaire response will be published on the Treasury and FSA websites
and the UK would be happy for it to be shared with other Member States.
Detailed questions
2.1 National rules covering the origination and (mis)selling of mortgage
credit
Are there any legal, including case law, or self-regulatory obligations in
your Member State for the lender or the credit intermediary to assess,
before the conclusion of the mortgage credit agreement, the consumer's
creditworthiness for consumer protection purposes, for example:
· to analyse in the first instance the ability of the borrower to repay
the loan and interest thereon from sustainable future income
streams;
Where a first charge mortgage is secured on the consumer's home, there is
an obligation on firms to have regard to the consumer's ability to repay. Firms
must have a responsible lending policy designed to deliver this, and should be
able to show how this policy was followed in each individual case. The policy
needs to have regard to foreseeable changes in circumstances including, for
example, where it is known that the mortgage payments will increase
(because a special discount will end) or the consumer's income will drop as a
result of reaching retirement age. The FSA responsible lending rules are in
MCOB 11.3: http://fsahandbook.info/FSA/html/handbook/MCOB/11/3.
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· and/or to assess as a fall-back resort the viability of re- financing
the mortgage interest and principal repayments in circumstances
of falling asset values and/or tighter lending market conditions;
There is no obligation to make an assessment of a potential fall-back position.
Lenders and intermediaries are, however, required to ensure that the
consumer receives information encouraging them to think about repayment
risks either as a result of an increase in interest rates or a reduction in
income.
Changes in asset values are particularly relevant to lifetime mortgages (equity
release loans aimed at older borrowers) where the mortgage debt is typically
repaid from the proceeds of the eventual property sale. In these cases, firms
must also indicate the potential impact of changes in house prices.
· and/or to consult a credit database.
There is no obligation to consult a credit database. However, this may be an
approach followed by firms as part of satisfying the high level responsible
lending obligations described above.
If yes, what are the penalties if the creditor/intermediary does not fulfil
this obligation? If not, do you have any plans to put such measures in
place? Please elaborate.
Where the FSA’s rules are breached, there is a range of possible sanctions
from warnings or public censure through to fines and the possibility of a firm’s
de-authorisation.
Are there any legal, including case law, or self-regulatory obligations for
lenders or credit intermediaries in Member States regarding the
provision of advice, including possible advice standards? If yes, what
are the penalties if the lender /intermediary does not fulfil this
obligation?
Firms may choose to offer advice, but are not obliged to do so. The FSA has
specific rules about the affordability and suitability of mortgage products,
which must be followed when advice is given.
Where a firm chooses to offer advice it must satisfy high level regulatory
requirements. Essentially, there are three elements to these requirements:
· the affordability of a mortgage option must be considered;
· the consumer's needs and circumstances must be identified; and
· where it has identified that a mortgage is affordable and that the firm has
access to products meeting the consumer's needs and circumstances, the
firm must recommend the most suitable mortgage from these.
The FSA advised sale rules are in MCOB 4.7:
http://fsahandbook.info/FSA/html/handbook/MCOB/4/7. The penalties are the
same as described in the previous answer.
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Are there any legal, including case law, or self-regulatory limits for the
creditor with regard to the loan-to-value ratio of a mortgage loans? If
yes, what are the penalties if the lender breaches this limit?
There are no legal or self-regulatory limits on the maximum loan-to-value. Any
such limit is an individual commercial decision for the lender.
Are there any other legal, including case law, or self-regulatory
'responsible lending' obligations in your Member State, such as the
obligation not to sell a mortgage loan in specific situations (for instance,
situations in which the lender considers that a loan would be too risky
for the consumer)?
The FSA has 11 high level regulatory principles which all regulated firms must
satisfy. These include the requirements that:
· a firm must pay due regard to the interests of its customers and treat
them fairly; and
· a firm must take reasonable care to ensure the suitability of its advice
for any customer who is entitled to rely upon its judgment.
The FSA Principles for Business are in PRIN 2.1:
http://fsahandbook.info/FSA/html/handbook/PRIN/2/1.
2.2 Observed practices of mis selling of mortgage credit
If there is any evidence of mis-selling of mortgage credit in your Member
State? If so, what is the level of the problem and when did it occur? If
you have not undertaken an exercise to collect such information, do you
have any plans to do so?
All UK mortgage firms are subject to supervision by the FSA, which has
undertaken a number of focused reviews of market standards. These have
considered aspects as diverse as responsible lending, self-certification
mortgages, the quality of advice processes in firms, lifetime mortgage sales,
lending into retirement, and the use of management information in firms. The
findings are made public (see www.fsa.gov.uk/mortgage).
While there has been a historic issue with mis-selling, this has not been of the
mortgage credit itself but of investment products (endowments) sold alongside
interest-only loans and intended to repay the outstanding capital. The FSA
has taken action against individual firms.
If Member States have observed an increase in default rates for
residential mortgage loans over the last years? Please provide evidence.
Default rates on residential mortgages have been rising in recent years,
causing repossessions to rise over the past 3 years from a historic low in
2004 of 8,200, following a trend decrease over the previous 13 years. Industry
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figures report that 27,100 properties were repossessed in 2007. Industry data
on arrears and repossessions is available from:
http://www.cml.org.uk/cml/statistics.
If Member States have observed an increase in actions brought to court
or to the attention of alternative dispute resolution schemes by
borrowers on alleged mis-selling of mortgage credit over the last years?
If yes, what has been the result of these actions and why? Please
elaborate.
The UK’s Financial Ombudsman Service reports a general increase over the
past few years in complaints about unaffordable lending, including
unaffordable mortgage lending. Nevertheless, mortgage products account for
only 4.5% of complaints received by the Ombudsman (and only some of these
complaints relate to mis-selling), and in overall terms, complaints about
mortgages remain low (using the annual figures last reported by the Financial
Ombudsman Service for 2006/07).
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