Warning over tracker mortgages
Updated on 02 December 2008
Lenders who impose interest rate floors on tracker mortgages may be breaching regulatory rules if customers were not warned about the issue when they took out the loan, the City watchdog said.
Many tracker mortgages have so-called floors or collars, which state that lenders will stop passing on interest rate reductions once the Bank of England base rate falls below a certain level.
But the Financial Services Authority warned lenders that, while these could be "legitimate terms", they ran the risk of breaching its requirements unless they were clearly explained to customers when they took out the loan.
Speaking at the Council of Mortgage Lenders' annual conference, Jon Pain, the FSA's retail markets manager, said if consumers were not told about the clause when they arranged their mortgage, it may be unenforceable.
He said: "Whilst tracker interest floors can be a legitimate term of a mortgage, this can only be if it is clear and unambiguous to the consumer and is consistently and prominently spelt out in the initial Key Facts Illustration and offer document throughout the sales process.
"If it is not, you run the real risk of both breaching our disclosure requirements and having an unfair contract term you can't enforce." He also repeated the regulator's recent demand that lenders treat customers who fall behind with mortgage payments fairly.
He said: "With falling house prices we have seen some lenders tempted to take swift action on arrears and repossessions to minimise losses. I have a clear message here and that is, in such a challenging operating environment, it is particularly important that you focus on the fair treatment of your customers when they go into arrears."
The FSA has recently written to the chief executives of all mortgage lenders calling on them to ensure that they are treating customers in financial difficulty fairly in practice.
The move followed a review by the FSA which found that across all sections of the market firms needed to make improvements in this area, with specialist lenders having the most work to do.
Mr Pain said the FSA had lessons to learn from the current market turmoil, and needed to make sure its regulation was focused on where the risks really were. He said: "We need to do all we can to prevent such extreme events happening again."
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