FSA has published a policy statement and rules which represent the outcome of the Mortgage Market Review (MMR). FSA says most of its December 2011 proposals are unchanged but it has rethought its approach in some areas. The suite of rules, which will take effect mainly on 26 April 2014, will have wide-ranging effects. FSA has enshrined three elements of the responsible lending reforms into the MMR rules – affordability assessments, interest rate stress tests and assessing affordability on a capital and interest basis. Key aspects of the new regime are:
- affordability: all customers must provide proof of their income as part of satisfying lenders that they can afford the mortgage;
- most mortgage sales will require advice and every seller must hold a relevant mortgage qualification;
- replacing the Initial Disclosure Document (IDD) with a requirement for firms to disclose "key messages" to customers, with changed trigger points for presentation of the key features information;
- higher loan-to-value lending is not banned, particularly for first-time borrowers, and interest-only mortgages will be allowed only if the borrower shows a credible repayment strategy;
- a "switch off" of the affordability requirements for existing customers (see below);
- giving flexibility in lending to older customers, the self-employed and entrepreneurs, and allowing high-net-worth customers to take out mortgages on an execution-only basis if they agree to opt out of suitability requirements;
- a requirement that customers exercising a right to buy must get mortgage advice;
- a requirement for customers getting a second charge shared equity loan to show they can afford payments on this loan as well as the mortgage; and
- rules for dealing with credit-impaired borrowers.
The main changes are:
- to introduce transitional rules to enable lenders to make exceptions to the rules on responsible lending where necessary to help "mortgage prisoners" remortgage, provided the outstanding amount to be repaid does not change;
- to clarify that simple contract variations where the repayable amount does not change can be carried out on a non-advised basis, but sales generally must be advised; and
- introducing a tailored approach for high-net-worth customers and business customers who borrow against their home. One element of this approach will be to allow these customers to opt out of advice.
FSA is also imposing enhanced prudential requirements on non-bank lenders, and will assess how to make these new requirements clear. The new rules will amend several parts of the Handbook, but mainly the Mortgages and Home Finance: Conduct of Business Sourcebook (MCOB). (Source: FSA Makes MMR Rules)