Second Charge

FCA warns on second charge affordability

The regulator is “concerned” about the high arrears rate in the second charge mortgage market and has warned secured loan providers to scrutinise affordability strictly.

Speaking at the Mortgage Business Expo in Leeds Lynda Blackwell, mortgage sector manager at the Financial Conduct Authority, said while the Mortgage Credit Directive has “generally been a good move for the market”, bringing the second charge market into the FCA’s regulated regime had been a “big structural change” and she warned “the historic sales process for seconds has been turned on its head”.

She said: “There’s new disclosure requirements, different fees and charges options, a whole new framework for dealing with payment shortfalls and repossessions, the need to give advice and a requirement for a thorough assessment of affordability.

“One of the concerns we have about the second charge market is the high arrears rates which are significantly higher than the average for the first charge market and at rates comparable to those that formed the poor tail of lending that the Mortgage Market Review looked to address on the first charge side.

“We saw evidence of poor affordability assessments, with some firms assessing affordability purely on the basis that the customer’s monthly outgoings were going to decrease if they consolidate debts, rather than assessing whether they could in fact afford to pay.”

She highlighted one provider’s recent advert claiming that borrowers who failed to get a first charge mortgage could still get a second charge.

The ad said: “Often cases can pass second charge mortgage income criteria that fail traditional first mortgage lenders [sic] income assessments.”

Blackwell said: “That simply shouldn’t be the case. The affordability requirements on firms are the same whether you are in the first or second charge market.”

Under MCD, which came into force on 21 March this year, there has to be an affordability assessment in every case under which income must be verified and, as a minimum, the lender must take account of the “actual committed expenditure” of the applicant and their essential household expenditures.

Additionally the affordability assessment means second charge lenders must stress test the client’s ability to repay if interest rates rise – taking into account the cumulative effect of a higher rate on the cost of both the first and second charge mortgages.

Blackwell challenged the lenders and brokers in the audience, saying: “If you fail an income assessment for the first charge market, why would you be passing the same income assessment for a second charge mortgage?”

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