The Financial Conduct Authority (FCA) has highlighted its concerns about some aspects of the second charge lending market by writing a Dear CEO letter to all lenders operating in this market. Second charge loans are often referred to as ‘secured loans’, or as the regulator prefers to call them, ‘second mortgages’.
The CEO or equivalent of every lender will need to reply to the FCA by May 1, and in the words of the letter, confirm “that your firm is lending responsibly and that your processes, systems and controls ensure this.”
The opening section of the letter says that the FCA is anxious “to prevent a return to poor lending practices seen during the run up to the financial crisis”, and that it aims to achieve this “by putting consideration of affordability for the borrower at the heart of any lending decision.”
The letter highlights five areas where the FCA has concerns about second charge lenders:
- Overall affordability assessments – firms cannot simply rely on income multiple models when making lending decisions and must carry out a comprehensive income and expenditure assessment on all applicants. However, even where firms were doing this, the FCA is concerned over the quality of some of these assessments, and comments on how plausible it is to expect a customer with large volumes of unsecured debts to have a large disposable income. Reference is also made to the need to carry out stress tests, to ensure that the customer can still afford the required repayments should interest rates increase
- Income assessment – comments are made here about firms’ use of tax and national insurance deductions for self-employed customers, and also refers to firms “relying on calculations contained within accountants’ certificates and other documents that did not appear to be plausible or realistic.”
- Expenditure assessment – firms are asked to ensure that the expenditure analysis model they use produces a realistic final assessment of customers’ expenditure. Firms are also urged to have controls in place to identify cases where the model they used may not have produced a realistic expenditure figure in any particular area
- Oversight arrangements – firms are asked to ensure that they have appropriate arrangements in place for monitoring the quality of their lending decisions, and that these arrangements are capable of identifying unaffordable loans and associated risk, and cases which may result in customer detriment. Specifically, the FCA makes reference to oversight arrangements that “appeared to be overly operationally focused; for example, establishing whether documents had been sent out or received, without monitoring the effectiveness of the firm’s affordability assessment.”
- Financial crime – Finally, lenders were warned that many of them “appear too ready to accept supporting documents at face value, without carrying out further due diligence or authenticity checks.” Examples include “some lenders … accepting what appeared to be Self-Assessment 302 (SA302) documents but which were screenshots of income tax calculations lifted from the HMRC website. However, the content of these screenshots could subsequently be amended when the applicant proceeded to the next stage and completed the tax return.”
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.