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FSA Warns Over Credit-risk Lending
Companies that grant loans to people with poor credit histories have been warned they could face enforcement action after the Financial Services Authority discovered three small mortgage brokers were failing to comply with rules designed to stamp out mis-selling.
The City watchdog said it had identified the three sub-prime firms - who lend to customers on elevated credit risk - as having helped customers overstate their income to obtain a larger mortgage. This could be an indication that brokers are acting aggressively in their efforts to get business from people who do not qualify for mortgages. The FSA refused to name the firms.
Andy Watson, head of the FSA's mortgages and credit union department, said: "Where we find examples of possible inflation of incomes, we will make further inquiries which may lead to referrals to enforcement."
The Association of Mortgage Intermediaries, the industry trade body that represents sub-prime brokers, called the alleged income exaggeration "extremely regrettable".
Ben Stafford, director of policy at the AMI, said: "This is a regulated market now and any firms that inflate income or don't put the proper procedures in place could face exposure and action from the FSA. It's fraud at the end of the day."
Since October companies have been required to supply customers with an initial disclosure document, which details the services it provides, and a key facts illustration giving personalised information about costs and risks of products. The documents are part of the regulator's drive to improve customer understanding of mortgages.
But in its review of compliance by small mortgage brokers published yesterday, the FSA said there were still "too many cases" where firms did not follow the required procedures.
In a recent exercise involving visits to 31 small brokers active in the sub-prime market, the FSA found that in 60 per cent of cases insufficient information was obtained about the customer. In 80 per cent of cases, the FSA said there was little evidence of how the brokers' recommended sub-prime product met the customer's needs and circumstances.
"It is difficult to establish the level of consumer detriment or potential mis-selling as many of the failings related to poor record-keeping and brokers could provide more detail when challenged, but we will be looking for better evidence of compliance with our requirements," said Mr Watson.
A further review of small firms in the sub-prime market is planned for next year.
The FSA is also conducting a review of small mortgage firms' activities in the self-certified market, where borrowers certify their own incomes, and will publish its findings this autumn. The FSA assumed oversight of mortgage regulation since October at the request of the government. The mortgage industry has about 2.75m consumers each year and the property market is worth about £3,000bn.
The investigation underscores a warning delivered by the FSA in May, when it told chief executives of mortgage lenders to improve the information they gave consumers about home loans.
By Rebecca Knight