All you need to know about the latest MMR paper

The final Mortgage Market Review consultation paper has arrived. Here are the main points...

Responsible lending and interest-only...

The affordability assessment
Lenders must verify income and be able to demonstrate that the mortgage is affordable, taking into account that figure for income and, as a minimum, the borrower's committed expenditure (which includes the mortgage payments) and essential household expenditure.

Lenders will have sole responsibility for assessing affordability and verifying income.

Interest rate stress test
Lenders must also take account of the impact on mortgage payments of market expectations of future interest rate increases.

Interest-only
Lender must assess affordability on a capital and interest repayment basis, unless there is a clearly understood and believable alternative source of capital repayment.

Repayment strategies
Lenders cannot accept speculative repayment strategies, such as reliance on increased property prices.

Lending beyond state pension age
Lenders must adopt a prudent and proportionate approach to assessing income where the mortgage term extends beyond the state pension age of the applicant.

Debt consolidation for credit impaired consumers
For credit impaired consumers consolidating debts, lenders will be required to either assume that the debts will remain outstanding by including them as "committed expenditure" or repay the debts directly to the creditor.

Transitional arrangements
Lenders will be allowed to waive affordability rules for new mortgage contracts, providing the borrower has a good repayment history. These arrangements do not compel the lender to lend; it remains a commercial decision for the firm.

Distribution and disclosure

Affordability
Intermediaries will not have to assess affordability and will only be required to determine whether the consumer meets the lender's expected eligibility criteria.

Advice
Non-advised sales process will be banned, requiring all sales that involve spoken or other interactive dialogue with the consumer to be advised.

Execution only
Consumers deemed to have sufficient financial knowledge, such as high-net-worth individuals and mortgages professionals, will be allowed to opt-out of receiving advice and purchase on an execution-only basis.

Vulnerable consumers
Vulnerable consumers considering higher risk products, including equity release, sale and rent back, right to buy and those consolidating debt, will not be allowed to opt-out of advice.

Opt out
With the exception of sale and rent back consumers, any consumer will be allowed to reject the advice they have been given and proceed to purchase on an execution-only basis.

Non-interactive sales
Except for those classed as vulnerable, no advice will be required where there is no spoken or other interactive communication in the sale, such as purely online and postal sales, and consumers will be able to purchase without advice.

Consumer information
The FSA has reduced its prescribed disclosure requirement for firms in order to reduce information overload for consumers. It has been refocused to require that key messages are brought to consumers' attention at the right time and manner.

Direct-only deals
The FSA intends to make it easier for intermediaries to recommend a direct-only deal by removing the requirement to provide a Key Facts Illustration (KFI) for those deals.

Arrears and Repossessions

Arrears charges

Rules around arrears charges have been increased to address the poor practice and significant abuses the FSA found in arrears handling practices.

The changes include new guidance in rules on administration costs and limiting the number of payments lenders can collect to two direct debits a month.

Non deposit taking lenders (non banks)

Prudential requirements

The FSA is introducing capital requirements non-deposit taking lenders to reflect the risks in non-bank lending. This includes requiring:

• non-bank lenders adopt a more risk-based regime

• the quality of capital is increased

• firms to put in place systems and controls to manage their liquidity risk effectively.

Niche markets

The FSA proposes that niche sectors will see a straight "read across" of the majority of its proposals, such as affordability checks, income verification etc, so that niche consumers are protected in the same way as conventional mortgage consumers.

Niche sectors include equity release, home purchase plans, sale and rent back, bridging finance, high-net-worth lending and business lending.

CHANGES SINCE PREVIOUS CONSULTATIONS...

Unchanged proposals...

Responsible lending

• Lender responsible for affordability checks

• Income to be verified in all cases

• Expenditure to be assessed in all cases

• Stress testing against future interest rate increases

Distribution and disclosure

• Removing requirement on intermediaries to assess affordability

• Requiring every seller to hold a relevant mortgage qualification

• Replacing the Initial Disclosure Document (IDD) with a requirement for firms to disclose "key messages" to the consumer

• Changing the trigger points for presentation of the KFI to reduce information overload for consumers

• Removing the requirement for independent firms to offer customers a fee-only option

• Requiring independent firms to disclose to customers whether they are sourcing direct-only deals

• Requiring firms to consider appropriateness of rolling fees into a loan

• Requiring consumers to positively elect to roll fees into the loan

Arrears charging practices

• Limiting the number of times fees for missed payments can be charged

• Widening the arrears charges and forbearance rules to cover all payment shortfalls

• Clarifying what costs can and cannot be recovered through arrears charges

Changed proposals...

Responsible lending

• Details of expenditure assessments

• Details of stress test against possible increases in interest rates

• Assessing affordability assuming capital and repayment basis in all cases - now will allow interest-only as long as there is a credible repayment strategy as per interest-only policy

Distribution & disclosure

• Instead of sellers assessing appropriateness across all sales, now advice must be given whenever there is spoken or other interaction with customers

• Rather than explaining the scope of their service, sellers must inform consumers of any limitations to their service ie products

• Instead of requiring sellers to assess if it is appropriate for consumers to take a further advance rather than remortgage, they now just need to inform consumer that a further advance may be available

Proposals consulted on that FSA will not proceed with...

Responsible lending

• Assessing affordability over a maximum 25-year term

• Requiring firms to apply an affordability buffer for credit-impaired consumers

Distribution & disclosure

• Replacing scope of service labels with the RDR approach of ‘independent' and ‘restricted'

• Requiring firms to provide two KFIs where the borrower is considering rolling fees into the loan

• Requiring sellers to assess if appropriate for the loan to extend into retirement

Proposals not yet consulted on...

• Interest only

• Arrears - removal of rule that permits removal of concessionary rates if consumer has a payment shortfall

• Prudential regime for non-banks

• Read across to niche markets

• Transitional arrangements