Bad Credit Gone

The Financial Services Authority (FSA) has shown signs that it is to step up the regulation of home loans after with a proposal to make borrowers take a mortgage affordability test from lenders.

The proposals will see self-certification mortgages banned, with lenders required to verify borrowers’ incomes.

FSA chief executive Hector Sants warned that some people who were able to take out mortgages during the boom times would no longer qualify under the proposed plans.

However, it steered away from a ban on 100% mortgages, or imposing limits on loan-to-value levels.

However, caps on mortgages may still be enforced further down the line if the initial plans fail to have a “sufficient effect”.

The proposed rules, described by the FSA as more “intrusive and interventionist”, include the following:

• Moving the responsibility for consumer assessments - in terms of their ability to repay, to the lenders, requiring them to evaluate borrowers’ monthly disposable income
• Banning “toxic combination” loans, such as a high loan-to-value loans for people that have poor credit scores
• Abolishing charges for borrowers that fall behind on payments, but are following arrangements to repay the arrears
• Further policing of the industry by the FSA to all mortgage advisers and arrangers.

Mr Sants said that a new approach to regulation is needed.

He stressed that policies must be put into place in order to ensure that history does not repeat itself, after irresponsible lending led to firms and consumers being put at risk.

“In the past, the prevailing regulatory philosophy was definitely based on the notion that banks would behave properly and not put themselves at risk and not put consumers at risk,” he said.

“I think we just have to recognise that both firms and indeed consumers just don’t always make the best decisions. They don’t always act in their their best interest or indeed in the best collective interest of society. So we need a new approach to regulation.”

In the UK, residential mortgage debt currently stands at an estimated £1.23 trillion, which makes up around 70% of all credit extended by lenders in the UK, the regulator said.