MPs review mortgage lending and Financial Services Authority

• Report: Mortgage arrears and access to mortgage finance
• Treasury Committee

The report notes that both mortgage arrears and repossession levels are on an upward trend and that both are expected to continue rising over the next few years as a result of the recession.

The Committee acknowledges that many mainstream lenders are taking pro–active steps to support consumers in mortgage difficulties, but expresses concern at the lack of flexibility and forbearance shown by some lenders in the sub-prime, specialist and second charge sectors towards homeowners in arrears.

John McFall, Chairman of the Committee said:

“Losing the family home is one of the most distressing experiences a family can go through. We have heard harrowing tales of households struggling to keep their heads above water in an attempt to avoid repossession.

"The next few years are likely to see the number of families in mortgage difficulties rise steeply. This is why it is so important to ensure that lenders are complying with the rules to only use repossession as a last resort and that the FSA is enforcing those rules properly.

"The Committee was extremely concerned by evidence that many sub–prime, specialist and second charge lenders are using repossession not as a tool of last resort, but instead of first resort. This is clearly unacceptable - the FSA and the Office of Fair Trading (OFT) must get a grip on this problem and crack down on lenders who are breaking the rules and mistreating customers in arrears.”

Mortgage arrears charges

The Committee shares the concern expressed by many of those who gave evidence to its inquiry that some lenders are charging high and excessive mortgage arrears fees to customers who fall into mortgage difficulties. The report voices concern that in many instances such charges appear to go beyond the recovery of additional administrative costs and are being used instead as an alternative profit stream.

The report describes such practices as ‘intolerable’ and calls upon the FSA to take a much more robust stance towards tackling and eliminating unfair arrears charges. As a first step, the Committee recommends that lenders should be required to provide an itemised breakdown of the additional costs their arrears charges are supposed to cover.

In the Committee’s view this would help shed valuable light on whether such charges are reasonable and justifiable, as industry representatives claimed was the case amongst mainstream lenders. Alongside this, the FSA and OFT should review all mortgage arrears charges made by mortgage providers and secured lenders to determine whether they are reasonable.

John McFall, Chairman of the Committee said:

“We have heard evidence of charges as high as 35 pounds from some lenders for simply sending a letter or making a phone call, and charges as high as 150 pounds for a visit from a so-called ‘debt counsellor.’ Such practices are intolerable and are placing additional financial as well as emotional strain on those already struggling to keep a roof over their head.

"We suspect that the small number of cases being brought against lenders making excessive arrears charges are merely the tip of the iceberg. This is why it is so important that lenders are compelled to open up their books and justify their charges, while the FSA must be prepared to take decisive action where it finds evidence of wrongdoing.”

FSA enforcement and naming miscreant firms

The report notes that in late 2007 the FSA first became concerned that some mortgage lenders were failing to treat their customers fairly when they fell into mortgage arrears, but that it was not until June 2009 that the FSA announced it was taking enforcement action against four firms.

The report criticises the seemingly leisurely approach of the FSA in terms of completing its mortgage arrears review and enforcing possible breaches in the mortgage arrears rules. It calls upon the FSA to spell out clearly in its forthcoming review how it will improve its performance in terms of bringing miscreant firms to book.

The report also deals with the naming of miscreant firms. Currently the FSA only publishes the names of firms it has found guilty of wrongdoing once enforcement action against the firm has been concluded. The Report notes with concern that the balance between disclosure to the public and the need to protect firms before they have been found guilty of wrongdoing may have tilted too far towards the interests of the industry.

John McFall, Chairman of the Committee said:

“I am shocked at the length of time it is taking the FSA to complete enforcement action against firms it suspects are breaking the rules. During this time many thousands of consumers will have suffered detriment and some will have lost their homes. The FSA must raise its game on the enforcement front and demonstrate that it can take action speedily and decisively where wrong doing is taking place.

"I am concerned by the FSA’s reluctance to name firms whom it is taking enforcement action against. It suggests that the FSA is more interested in protecting lenders who are treating their customers unfairly and that it is placing the interests of lenders above those of consumers. We call upon the FSA to shift this balance towards consumers and believe that a failure to do so would be taken as evidence of the FSA’s cosy relationship with the industry.”

Government support for homeowners in mortgage difficulties

The Committee welcomes the measures which the Government has introduced to support homeowners in mortgage difficulties. However, the need for the introduction of a large number of new initiatives as well as the amendment of schemes in place before the current crisis suggests that adequate safety nets for homeowners in mortgage arrears and/or at risk of repossession were not in place prior to the current recession.

The report recommends that the Government re-examine its longer-term strategy towards supporting homeowners in mortgage difficulties to ensure that adequate mechanisms to support homeowners are in place even once the current downturn has ended.

The report also notes that Mortgage Rescue Scheme has directly benefited just six households, despite being designed to assist upwards of 6,000. It calls upon the Treasury and the Department of Communities and Local Government to explain why their projections for participation in the scheme appear to be so out of step with the picture on the ground and requests analysis as to whether this reflects flaws in forecasting, poor design of the scheme or lack of consumer demand.