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    14-10-2013

    Dealing fairly with interest-only mortgage customers who risk being unable to repay their loan

    In May 2013, the Financial Conduct Authority (FCA) consulted on guidance about dealing fairly with interest-only mortgage customers who risk being unable to repay their loan. The FCA have now considered the responses and on 29 August 2013 published finalised guidance (FG13/7), along with a summary of the feedback received.

    The review of lenders’ strategies, policies and practices covered eight lenders (23 mortgage brands), representing approximately 40% of the UK interest-only residential mortgage market (i.e. excluding buy-to-let mortgages). The FCA found that the industry is engaged with the interest-only maturity risk and that firms are generally trying to treat customers fairly, but are at different stages of engagement with the maturity risk.

    The guidance sets out what the FCA expect firms to do to ensure the fair treatment of customers who are unable to repay the capital sum at the end of the term, and to minimise the risk of non-repayment through early and effective consumer engagement over the mortgage term. The FCA states that to ‘pay due regard to the interests of its customers and treat them fairly’ lenders should do the following:-

    1. Have a written strategy setting out the firm’s policy and procedural framework for managing mortgage loans that may not be repaid in full at the end of the term.
    2. Consider what options can be offered to interest-only customers, either during the mortgage term or at maturity, demonstrating why the firm offers some options and not others.
    3. Provide procedural guidance for front-line staff on how to execute the firm’s policy, with appropriate monitoring to ensure fair and consistent customer outcomes.
    4. Collate enough management information to enable the firm to monitor its interest-only back book and review the performance of mitigation actions taken during the mortgage term or after maturity.
    5. Communicate early and frequently according to the potential risk of non-repayment within the firm’s mortgage book, communicating more regularly as customers approach the end of the mortgage term.
    6. Give customers enough time to consider maturity options, especially if the firm’s range of options is limited or if customers must meet specific criteria to be eligible; customers may wish to consider other options and should be given enough time to do so.
    7. Assess affordability if any variation to an existing mortgage materially increases the monthly payment or where the revised terms extend the loan into retirement.  
    8. Consider MCOB 11.8.1E. Some interest-only customers may be unable to change their mortgage or move to a different provider. Firms should be able to demonstrate how they have complied with Principle 6 (Customers’ interests) in their treatment of such ‘trapped’ customers. For instance, they should not unfairly charge them a higher rate of interest than other customers to exploit the fact that they are unable to exit the mortgage.

    Examples of potential options that lenders could consider either before or after the mortgage matures are listed below (this list is not exhaustive):

    • switching the mortgage to a full or part capital-repayment basis
    • extending the mortgage term incorporating a switch to a full or part capital-repayment basis
    • extending the mortgage term to provide more time to repay the capital outstanding or to sell the property
    • accepting overpayments to reduce the end-of-term balance
    • combining part redemption and any of the above
    • extending the mortgage term on an interest-only basis
    • combining any of the above

    Click to view the finalised guidance and the FCA's summary of feedback.

    HM Land Registry has updated its practice guides 34 and 75 to confirm that a charge survives disclaimer as does a mortgagee’s power of sale

    Once a bankruptcy order is made against a borrower, a trustee in bankruptcy is appointed. When the appointment of the trustee in bankruptcy takes effect, the bankrupt’s estate vests in the trustee automatically without any transfer. That estate includes any registered property or registered charges that the bankrupt person owns for their own benefit but property held by the bankrupt on trust for any other person (eg. jointly owned property) is excluded.

    By giving the prescribed notice pursuant to Section 315 of the Insolvency Act 1986, a trustee in bankruptcy may disclaim onerous property. Under rule 6.178(3) of the Insolvency Rules 1986, the trustee in bankruptcy must send the Land Registry a copy of the notice of disclaimer of a registered estate or of a registered charge as soon as reasonably practicable after it has been authenticated (ie. signed) and dated by the trustee. The Land Registry will then make a note of the disclaimer in the register.

    Where the trustee seeks to disclaim a freehold property, if no vesting order is made by the court, the freehold estate determines and the property passes to the Crown or to one of the Royal Duchies of Cornwall or Lancaster. However, the Land Registry will not close the registered title for the property unless and until there is either a grant of a new freehold estate from the Crown or a transfer from one of the Royal Duchies.

    Where the trustee seeks to disclaim a leasehold property, the disclaimer does not take effect until:

    • a copy of the disclaimer has been served on any under lessee or mortgagees (if the property is a dwelling house a copy must be served on every person in occupation or claiming a right to occupy the house)

     and either:

    • 14 days have elapsed from the day on which the last notice was served without an application for a vesting order having been made to the court, or
    • the court has directed that the disclaimer is to take effect.

    However, as determination of a lease by disclaimer does not affect the rights and liabilities acquired before the disclaimer by persons other than the tenant, the Land Registry will not close the registered leasehold title if there is a registered or noted charge in the title unless the following is also lodged:

    • an application to discharge the registered charge or to cancel the entry of the noted charge
    • evidence that the chargee’s application for a vesting order has been dismissed (so that the chargee is excluded from all interest in the property under s.321(4), IA 1986), or
    • evidence of forfeiture of the lease.

    In summary, whilst the Land Registry’s amendments to their practice guides have clarified the process and confirmed that a mortgagee’s charge and power of sale survives a notice of disclaimer, it is still crucial, where a mortgagee receives notice of the disclaimer, to make an application for a vesting order immediately as an applicant only has  3 months of becoming aware of the disclaimer to make the application.

     CML publishes its response to the Ministry of Justice’s Legal Services Review call for evidence

    On 5 June 2013, the Ministry of Justice issued a written statement calling for evidence of a legal services review. By way of background, the perceived complexities of the current legal services regulatory landscape have been raised with Ministers by a number of different stakeholders and Ministers have decided to undertake a review of the legal services statutory framework. The purpose of this review is to consider what could be done to simplify the regulatory framework and reduce unnecessary burdens on the legal sector whilst retaining appropriate regulatory oversight.

    The Council of Mortgage Lenders is one of the stakeholders who have been called upon for evidence by the Ministry of Justice and on 30 August 2013, the CML published its response. The CML’s response is limited to specific issues arising from lenders’ use of legal services for the conveyancing process across the UK. The main points arising from the CML’s response are as follows:-

    • The CML agrees that though lenders are regular users of legal services, even they can find the plethora of legal regulators confusing.
    • The credit crunch and subsequent uncovering of significant solicitor fraud in England and Wales has led to a drop in lender confidence about the regulation and standards of legal service providers.
    • Changes to regulation should have, as a key aim, a focus on providing a good standard of service, with robust enforcement of appropriate standards.
    • The current key concern of most lenders, is around obtaining compensation when the provider of legal services has caused the lender loss either through negligence or through fraudulent activity, or other criminal acts such as theft.
    • A majority of CML’s members have expressed concerns about the compensation arrangements provided by the SRA. In particular, they have reported that they have been held to a far more stringent set of standards when claiming from the Solicitor’s Compensation Fund, than they would have been held to under their own regulator, and as a result, very few of the claims they have made have been successful.
    • Lenders have also had difficulty in obtaining compensation via indemnity insurance, where negligence is involved. Often claims will be aggregated by a professional indemnity insurer so as to reach liability limits quickly, which risks leaving the lender out of pocket.
    • The CML advocates a single set of compensation arrangements for the entire legal sector.