Tough rules to end 'reckless' banking
Updated on 19 October 2009
Prove you can pay or be refused a mortgage. The Financial Services Authority announces tough new rules in a bid to stop unsafe lending and prevent a future banking crisis. But is it fair?
The FSA is poised to force lenders to look much more closely at the ability of people to make repayments, such as checking spending habits and existing loan commitments.
A ban on self-certification mortgages - under which borrowers do not have to prove their income - is also likely under the FSA's planned reforms for the market in the wake of the credit crunch.
But it is expected to stop short of imposing caps on the loan-to-value ratios and income multiples that lenders can advance to homeowners after consulting the industry.
The key points outlined by the FSA's proposals are:
- Imposing affordability tests for all mortgages and making lenders responsible for assessing a consumer's ability to pay.
- Banning "self-cert" mortgages through verification of borrowers' income.
- Banning the sale of products which contain certain "toxic combinations" of characteristics that put borrowers at risk.
- Banning arrears charges when a borrower is already repaying whilst ensuring firms do not profit from people in arrears.
- All mortgage advisers will be personally accountable to the FSA.
- Calling for the FSA's scope to cover buy-to-let and all lending secured on a home.
FSA chairman Lord Turner said in March that the rapid expansion of mortgage lending in the UK was a key factor in triggering the current financial crisis. He added that the high loan-to-value ratios and high loan-to-income ratios advanced to borrowers by lenders had played an important role in the problems.
At the weekend Gordon Brown pledged to end "reckless" banking practices as the City, saying the "much tougher rules" would protect voters.
"I'm determined to end the reckless banking practices that have left so many of you worried about your household budgets," he said in his latest webcast on the Downing Street website.
"So to give you a better deal we are taking extensive action to reform the whole culture of the financial sector and to protect and empower you, the consumer."
But the suggestion that the FSA may start to regulate mortgage products, as well as the sales process, provoked stiff opposition from the industry.
Robert Sinclair, director of the Association of Mortgage Intermediaries, said: "House prices in the UK are affected by demand and a lack of supply much more so than elsewhere and house price bubbles are not caused by lax lending.
"The regulatory structure needs to balance the need to protect consumers from unaffordable debt with their desire to buy a home of their own.
"We do not believe that the regulation of mortgage products will have the desired effect. In fact, it will restrict consumers unnecessarily."
Commentators have also questioned how effective a ban on self-certification and fast track mortgages, under which borrowers do not have to verify their income, would be.
