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Wednesday, 29 September, 1999, 17:00 GMT
Q&A: Crackdown on home lenders

Trade and Industry Secretary Stephen Byers is summoning bank and building society chiefs to a special summit over mortgage selling and charging. BBC Personal Finance Correspondent Andrew Verity explains what it will mean for lenders, estate agents and borrowers.

What's wrong with the mortgage market at the moment?

The Property Maze
According to the mortgage lenders themselves, it needs proper regulation.

The people who sell mortgages - estate agents and financial advisers - do not have to receive any training.

They also receive different levels of commission for selling different products, creating an incentive for them to steer customers towards high-commission products, like endowments, rather than low-commission products, like repayment mortgages. Recent undercover surveys have uncovered evidence of mortgage sellers giving unsuitable advice to customers.

The government is also concerned about the way some mortgages have in-built "stings" - the hidden charges and terms buried in the small print of a mortgage offer. These include mortgage "lock-ins" - where borrowers take out a fixed-rate mortgage and are bound, on pain of paying a hefty penalty, to stick with the lender - even after the fixed-rate is over.

Lenders like Abbey National have abolished lock-ins like this, calling it a "bait-and-hook" approach to lending: the bait is the attractive headline interest rate; the hook is the hefty penalty.

Another practice is for lenders to "bundle" products together. This means they offer substantially lower mortgage rates to customers who also buy buildings and contents insurance from them.

Customers who go for the lower rate may not realise they are not actually getting a better deal. What's given with one hand - the lower rate - is taken away with another - a higher insurance premium. The insurer pays the lender a hefty commission for selling its cover.

Groups like the Consumers Association think clauses like these break the Unfair Terms in Consumer Contracts Regulations, 1994. This is a European law designed to stamp out sharp practice in any consumer contract.

What is the government proposing to do about it?

Stephen Byers, the Secretary of State for Trade and Industry, is calling a summit of banks and consumer groups to thrash out ways to prevent customers being hoodwinked.

One of the issues on the table is whether to introduce new laws to stamp out unfair mortgage terms in his Consumer White Paper.

This could be used to stop the bundling described above. It might even stop lenders offering mortgages with extended lock-ins.

The Council of Mortgage Lenders was surprised by Mr Byers' intervention. That is because the Treasury is already consulting the industry about the future of the mortgage market, and the consultation will end on October 22.

The Council of Mortgage Lenders has always wanted the industry to regulate itself. But it has recently accepted that regulation by law - statutory regulations - is inevitable. On Tuesday it called for supervision by the Financial Services Authority, the City regulator.

How will the changes benefit housebuyers?

Mortgage sellers will be under a much tighter rein.

If they try to steer customers into the wrong product - for example, an unnecessary endowment - they will be breaking the law. They may be fined and stopped from working.

Any misdemeanours are much more likely to be discovered, because the Financial Services Authority will visit their offices and supervise their work from time to time.

A clampdown on unfair mortgage terms should also put an end to "bait-and-hook" marketing (as described above).

Are estate agents and banks happy about the proposals?

The estate agents are not. Any regulation means they must undertake careful checks on their sales people - or risk being put out of business.

That could mean bureaucracy and extra cost.

Staff will also have to be carefully trained and not told purely to concentrate on sales.

Banks are publicly welcoming the government's initiatives. They privately say they have "seen the writing on the wall" and see no point in resisting.

They also hope that a legal clampdown could help to clean up the industry's image.

When is there likely to be a change?

Mr Byers may try to stamp out unfair mortgage terms by introducing new proposals when the Consumer White Paper becomes a Bill - early next year.

Separately the Treasury may introduce statutory regulation of mortgage sales even sooner. It already has reserve powers to bring in regulation in the Financial Services and Markets Bill, the big City reform Bill now working its way through Parliament.

Will my existing mortgage be affected?

Not by Mr Byers's proposals, or those from the Treasury. However, it will affect the information you get if you want to swap your mortgage for another in the near future.

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See also:
29 Sep 99 |  Your Money
Mortgage lenders face summit quiz
28 Sep 99 |  Your Money
Mortgage lenders accept regulation
20 Jul 99 |  Your Money
Home lenders face clampdown
20 Jul 99 |  Your Money
Rethink on lock-in mortgages

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