Fear of being sued makes lenders toughen criteria

Monday, 20th February, 2012

Fears that they could be sued if a borrower’s repayment vehicle fails to pay off their interest-only mortgage are behind lenders’ recent criteria changes, trade bodies have claimed. The Council of Mortgage Lenders and the Intermediary Mortgage Lenders Association are warning that proposals in the Mortgage Market Review could pave the way for lenders being sued should the repayment vehicle not cover the mortgage balance at the end of the term. The Financial Services Authority’s latest MMR paper, published in December 2011, puts the onus on lenders and says they must judge whether the repayment vehicle has the potential to repay the mortgage. John Heron, chairman of IMLA, says that if a lender is expected to check the appropriateness of a particular vehicle, it raises questions aboutwhere the responsibility lies if it fails. He adds: “If it is going to be judged in retrospect, will lenders have been expected to assess the robustness of the repayment vehicle according to information at the time or future considerations? “You can understand why lenders are likely to address this by constraining their criteria.” Meanwhile, in its latest News & Views newsletter, the CML warns: “The FSA clearly states that ‘the repayment of a mortgage is the ultimate responsibility of the borrower’. “But borrowers and the Financial Ombudsman Service will need to clearly understand that despite lenders having to assess the probability of the chosen repayment method meeting its target, borrowers, not lenders, will actually be responsible for the repayment method they choose.” Ray Boulger, senior technical manager at John Charcol, says lenders are not willing to take the risk. He says: “The MMR puts so much responsibility on lenders to ensure any investment plan will produce sufficient funds to pay off the mortgage that they are understandably not prepared to take the risk of being sued by borrowers for any shortfall.” Last week, Lloyds Banking Group announced a string of interest-only restrictions. It will no longer accept cash savings, including ISAs, as a suitable repayment vehicle. It also placed restrictions on using stocks and shares as a repayment vehicle and specified that pensions must have a minimum current value of more than £1m. This followed Santander reducing its maximum LTV for interest-only from 75% to 50% the previous week . Complete Mortgages are whole of market mortgage brokers based in Guildford, Surrey.  We have many years of experience and are equipped to deal with all types of mortgage, no matter how complex.  Please contact us on 0845 658 6060 / 01483 233014 for a consultation.