FSA has published a further consultation paper on the Mortgage Market Review (MMR). This paper aims to encourage responsible lending, based on sensible assumptions. FSA has revised its proposals following previous consultations, and the new rules are based on three core principles:
- lenders should assess affordability and ability to repay of the borrower without relying on uncertain future rises in house prices;
- the assessment of affordability should take account of possible future rises in interest rates; and
- interest-only mortgages will not be banned, but should be assessed on the basis of repayment unless there is a good strategy for repayment out of capital resources that does not depend on rising house prices.
A key change will be that FSA will require income of borrowers to be verified, ending both self-certified and fasttracked mortgages. FSA says that existing mortgages will not be affected and lenders will still have flexibility in what they offer to existing customers. Although it will require borrowers with certain requirements (such as consolidating debt with their mortgage) to take advice, it will not require lenders to assess every item of household expenditure when considering affordability – but they must consider unavoidable expenses. FSA believes the changes will make little difference to the current pattern of mortgage lending, but will ensure lending is less risky in future. The detailed paper, which sets out how FSA proposes to amend many of the current conduct of business rules, includes:
- proposals for prudential regulation of non-bank lenders;
- information on how FSA intends to tailor the regime for niche markets, including high net worth and business lending; and
- a cost benefit analysis and a data pack.
FSA asks for comments by 30 March 2012. (Source: FSA Consults on Responsible Lending and the MMR)