Where homes and livelihoods are concerned, secured lending may be preferable for the provider, but for the misdirected customer, encouraged to falsely state their income, the consequences are more than just risky, they are dire.
Self-certification mortgages, (also known as ‘self-cert’ mortgages), were banned by the FSA in 2010 as part of the Mortgage Market Review. This was effectively a mortgage which did not require verification of an applicant’s income. Originally designed to assist self-employed applicants who found it problematic to evidence regular income from an independent source, the product became more widely marketed during 2007-08. Its popularity grew to the extent that the FSA believed non-income-verified mortgages to account for ‘around half of all mortgage applications [pdf].'
Affordability criteria is a key part of responsible lending and lenders are now required to evidence that sufficient assessment of an applicant’s income and outgoings has been undertaken. This responsible approach has been further strengthened by the MMR through the introduction of the requirement of ‘stress-test affordability’. This requires lenders to check that consumers have sufficient disposable income to repay the mortgage at a higher interest rate than at the time of application.
And so to 2016…the FCA at the end of last month issued a warning to customers who may be attracted to online self-certification mortgage providers based outside the UK. They advise: ‘anyone taking out a mortgage offered from outside the UK under the Electronic Commerce Directive will lose UK consumer protection benefits such as the right to refer complaints to the Financial Ombudsman Service….[and] if anything goes wrong, the responsibility is with the other EEA state’s authorities.' The FCA also indicate a further limitation in that any customers finding themselves in financial difficulties with such providers would only be able to undertake direct discussions with the firm online rather than in writing, face-to-face or by phone.
The warnings appear to be in response to the launch of SelfCert. The SelfCert.co.uk domain name was bought by Quick Loans, a UK firm whose founder, Graeme Wingate, closed down its UK operation, returned its FCA licence and relocated to the Czech Republic. SelfCert.co.uk launched in January 2016 and their website declares: ‘We are not based in the UK; by being based abroad we are able to make our own decisions. One of those decisions is to bring back Self Cert Mortgages.' They report that they received over 7,500 applications but that their capital was fully utilised through the provision of just 300 mortgages. At present the website has a response to the FCA critique and the dialogue is robust, suggesting that they are consumer champions and querying why self-certification mortgages are more risky than self-certification credit cards or other unsecured borrowing.
For those who remember, self-certification mortgages reflected a culture of irresponsible lending. They earned the moniker ‘liar mortgages’, indicating that lenders encouraged borrowers to mis-cite their income in order to gain the loan value desired. The FSA withdrew them from the market in response to customer complaints and adverse media documentaries. The product was accused of adding to customers’ financial difficulties because they encouraged the taking out of larger loans than sustainable when interest rates increased. I can well remember finance students at the time of self-certification mortgages querying whether mis-quoting their income on such applications was really illegal. Many of my professional students who worked in the industry had not realised the implications of what they themselves had signed. Where homes and livelihoods are concerned, secured lending may be preferable for the provider, but for the misdirected customer, encouraged to falsely state their income, the consequences are more than just risky, they are dire. The FCA is right to guide and warn, and publicise the rationale behind past decisions.