Mortgage reforms Wednesday, 21st October 2009

To ensure that it works better for consumers and is sustainable for all market participants,the Financial Services Authority (FSA) today sets out proposals for the major reforms required in the UK mortgage market

Theirs is changed approach to a more intrusive and interventionist style of regulation.

The mains features are as follow:-

• Imposing affordability tests for all mortgages. The DP proposes making the lender ultimately responsible in every sale for verifying affordability. It also proposes that in each case a lender should assess the consumer's ability to repay, i.e. calculate the free disposable income a consumer has to pay for the mortgage.

• Banning ‘self-cert' mortgages through required verification of borrowers' income.

• Banning the sale of products which contain certain ‘toxic combinations' of characteristics that put borrowers at risk. The DP discusses whether a type of product regulation likely to be more effective in protecting consumers would be to prohibit loans to borrowers that exhibit certain multiple high-risk characteristics, such as prohibiting loans to credit-impaired borrowers that are also at high loan-to-income.

• Banning arrears charges when a borrower is already repaying and ensuring firms do not profit from people in arrears. The FSA will publish specific proposals in January to toughen up rules on arrears handling as well as banning administration charges where a borrower is adhering to an arrangement to repay arrears; and prohibiting the charging of early redemption charges on arrears fees.

• Requiring all mortgage advisers to be personally accountable to the FSA. DP proposes extending the Approved Persons regime to mortgage advisers who deal with consumers and to advisers and/or arrangers who are responsible for overseeing compliance

• Calling for the FSA's scope to cover buy-to-let and all lending secured on a home.

It is recognised that the mortgage market has seen extraordinary upheaval over the last 18 months and that a change in regulation is required now to address the issues that have been identified.

They want to ensure that firms only lend to people who can afford to pay the money back.

The discussion paper is out for discussion until 30 January 2010 and the FSA will be actively seeking views from consumer groups and industry. A feedback statement will be published in March. Implementation will be phased, with the focus on speed for areas of high detriment, such as arrears.