The FSA has found too many lenders move straight to repossession
New rules to protect mortgage holders who are in arrears have been proposed by the Financial Services Authority.
The FSA says it wants to ensure that those borrowers are treated fairly, especially ones who have borrowed from specialist lenders.
It wants to ensure that repossession is a last resort and that borrowers in arrears are not levied unfair charges.
But the Council of Mortgage Lenders (CML) described one of the proposals as "heavy-handed".
The proposals are part of the FSA's current review of the way the mortgage market works.
"Today's proposals underline the standards that firms must meet and will help to ensure that homeowners in financial difficulties are treated fairly," said Lesley Titcomb of the FSA.
"Lenders need to be in no doubt of their obligations to customers who fall behind with payments and must realise that such circumstances are not an opportunity to create further profits," she added.
As of last September there were 194,600 mortgages in arrears by 2.5% or more of their outstanding balance.
Earlier in the year, the FSA's own research had identified the aggressive treatment, by some lenders, of their borrowers in arrears as a particular problem.
"In many cases, it found a high incidence of mortgages moving straight into arrears and potential breaches of responsible lending rules," the FSA said.
So the main points of the its latest consultation are that:
• firms must not add early repayment charges onto any arrears charges, or charge interest on those charges
• firms must not levy a monthly arrears charge if the firm and the customer have agreed a plan to repay the arrears
• firms must consider all options for borrowers and use repossession as a last resort
• payments by customers in financial difficulties must go to clearing arrears first, with arrears charges being paid off later
• all telephone calls and records about customers arrears must be kept for three years.
Citizens Advice welcomed the plans.
"In December 2009 we published a report which found that whilst recent government packages for supporting homeowners were making a difference, in a third of recorded cases lenders had failed to comply with new rules requiring them to take court action only as a last resort," said the charity's spokeswoman Sue Edwards.
Last autumn, the first part of the regulator's mortgage market review proposed that self-certified mortgages should be banned.
All borrowers would be required to show that they could afford to repay their home loans.
The FSA now wants to introduce tighter regulation of mortgage broking firms and their staff.
In the past year or so, dozens of individual brokers have been found guilty by the FSA of fraudulent behaviour, typically by submitting bogus applications to lenders.
The regulator's new proposals will mean that all mortgage advisers, even those who arrange mortgage sales without giving advice, will have to prove to the FSA that they are "fit and proper" for their jobs.
"Extending our Approved Persons regime in this area would reduce mortgage fraud and unsuitable advice by allowing us to prevent unfit or rogue individuals from entering the industry to ensure that consumers are better protected," the FSA explained.
But the Council of Mortgage Lenders (CML) considered this move "heavy-handed" and more expensive than the FSA estimated.
"At first glance, the extension of the approved persons regime to both lenders and intermediaries appears heavy-handed, at least as far as lenders are concerned, and may be a sledgehammer to crack a nut," said CML director general Michael Coogan.
"The number of sales advisers identified by the FSA also appears lower than we would expect, suggesting that the FSA may be underestimating the cost of implementing this proposal both for the regulator and firms."
However, he said that the CML "broadly agreed" with the plans for dealing with arrears, although they could add significantly to lenders' costs.
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