FSA closes the mortgage stable door.....

baby_boomer

.....after the reckless lending horse has bolted.

September's MoneyFacts has an article for mortgage brokers, advising them to sharpen up their act since the FSA's "Enforcement Division" has eventually got round to issuing a number of "Final Notices" for breach of the FSA Handbook and in particular the MCOB (Mortgage Conduct of Business Rules).

Readers of this forum won't be surprised to learn that the FSA is picking up on:

1) Affordability.
Firms are required to demonstrate that the mortgage is affordable during the initial incentive period and after. Affordability evidence is required in the form of pay slips, bank statements etc.

Hardly rocket science, but some brokers will be quaking in their boots!

2) Attention to debt consolidation lending
When moving someone's unsecured loans onto the mortgage, did the firm assess the cost of moving to a longer term loan, whether it was appropriate to secure the loan and whether it would have been better to renogotiate with existing creditors e.g. using the CAB.

3)Guarding against financial crime
A number of firms have been found to have inadequate controls. They were not spotting anomalies in the information provided or using their common sense .
Did the firms have a list of average wages for the most common trades & professions? Did they question why a self-certification mortgage was needed if the applicant claimed to be employed? Did they ask themselves if the self-certification mortgage was based on income from crime or income that the applicant was trying to hide from the taxman?

>> As I suggested, it's all much too late. However the tightening of controls is currently adding to the difficulties people are having in getting a mortgage or remortgaging - even with a perfect credit record & payment history. And there should be some interesting stories to come out of these ongoing FSA investigations once the compensation bandwagon gets underway.

carolt

Very interesting. Thanks.

JonnyBravo

These people really were just the white collar equivalent of cowboy builders.

Fewer "final notices" and more "sorry, you can no longer work in this industry" notices would be welcome.

Bf109

What about the banks?

HelpWhereIcan

I agree with the general sentiment that there is a type of broker that needs to be driven out of the industry and that there are some who have been fraudulent.

However, I think it is important to note that the FSA is not referring to what a broker should be doing (ie checking affordability, advice on debt consolidation and looking out for fraud) but the evidence that the FSA would expect to see retained on a customer's file when they inspect them.

In other words:

1. Affordability - the FSA has always expected brokers to check and prove affordability, however some brokers have not been keeping copies of payslips and just entering in the file what the salary was. The fact that the FSA could ask the lender for copies of the payslips provided to ensure no fraud took place is not the point - the broker still did not keep copies for their file and the FSA has always said that the file should be capable of being looked at in isolation and being completely understood.

Again, some brokers would say they did and income and expenditure check/discussion with the client but will not have kept a copy of the calculation or mention it in their reasons why letter.

2. Debt consolidation Again, this is about the firm being able to prove that they did the calculations and discussed all the pros and cons with a client - most will say they did, but have they kept copies of the calculations? Most will have had the conversation with the client and kept the calculations on file but not written down the figures in the reasons why letter. What if the client then (falsely) claims that the broker did not have the conversation. What proof does the broker have that they discussed specific figures with the client? The reasons why letter with those specific figures in it.

For example, my reasons why letter has a paragraph about consolidation that effectively says - you are aware that by consolidating 10k you will now be paying that debt over 25 years rather than 7 and have a total to pay of £20k rather than the £14k you would have had if you'd kept it as an unsecured loan. However, because the monthly payments were lower by £180 you wanted to go ahead with it. Then usual warnings about it becoming secured etc etc.

3. Financial Crime - again always been something we are required to do. However, again something some have not always kept great records of:

anomalies - a client claims to have 2 sources of income - his employed salary and income from buy to lets.

He wants to self cert cos he has £7000 excess rental income after the buy to let mortgages have been deducted and a package that is heavily based in commission (£9000 basic £27,000 commission).

However, when I look at the figures I notice that the rents he claims for a couple of the properties are quite high for the area (based on my knowledge of the area alone) and that (when I look at a bank statement) there is a payment to a letting agent. He has also not taken any letting agent's fees into account.

I query this and it turns out that the 2 buy to lets in question are on long term lets to a major petroleum firm that employs a lot of contract workers on a huge construction project they have and that he only uses the letting agent to find the tenant rather than manage the other properties. The charge on the bank statement is a one off.

Therefore a quick deduction for the tenant finding fees adjusts the income to be declared for him and a copy of the tenancy agreement for the 'high' rent properties is placed on file. True case (that we placed without having to self cert in the end).

If the FSA just looked at the bank statements and raised the same questions I did, I could now prove that I addressed those anomalies. Had I just let it go, there would have been no financial crime committed and the FSA could make the checks to make sure, but I would not have been able to prove that I had checked it.

list of average wages - unlike some people like to claim there is no right or wrong figure for someone to be earning and the fact that someone declares a high level if income is not an indicator of financial crime.

For example, I have 2 customers that are both self employed plumbers and both took a remortgage in the same month (neither self certed). One was on his own doing mainly CIS scheme work - he was on £27,000 ish net profit. The other had 2 guys working for him fulltime, a couple of CIS guys and had a couple of lucrative commercial contracts, also a very good businessman - he netted £80k last year.

My experience of plumbers in this area means that one coming to me looking to self cert claiming over £35k ish would need closer looking at to explain why they earned so much more than anyone else. Not having a list of average wages could mean that you are not aware of what those figures are and when the FSA ask you to prove how you make those judgements you could come unstuck.

If an employed person comes to me claiming to be an IT manager on £95k per year, but I know the average for the same role in the area is £35k - then maybe I am better having a word with the underwriter to warn them of that fact and suggest they get an employment reference/make enquiries with HMRC to back up the apparantly legit payslips.

If I cannot prove that I am aware of the averages, I cannot prove that I help spot fake payslips etc (unless I can point to a case) even though I may well be very honest. Not all brokers know when a client uses them to commit fraud.

Again, the "did they ask themselves" questions are about the broker being able to show on their written/computerised file that they did consider these possibilities.

The adviser may well have looked to see if they could get someone a 'normal' mortgage rather than a self cert, but can he prove it?

As shocking as it may appear, this article is actually more about record keeping standards than standards of advice.

The FSA rules on these things have not changed - just the standard of evidence that the FSA expects you to keep is receiving a lot of attention in the trade press etc.

If you look, you will see that those on Final Notices will generally be ones where 'customers have been put at risk of X' due to poor controls, standards of record keeping etc - whether fraud has been suspected or not. Most have had to pay for an independent review of all their files to check for fraud and/or mis-selling. A very costly exercise when you have not committed fraud or given bad advice. Enforcement action being taken does not always mean that fraud has been committed or that mis-selling has taken place.

Those who have been found to have committed fraud or assisted in committing fraud have been banned - there is no additional supervision, public censure, fine or Final Notice option in those cases.

Solicitors and Valuers have also played a large part in mortgage fraud - the large scale ones cannot happen without the collusion of at least 1 of those with the Broker and client/developer. From what I have seen, justice moves a lot more swiftly within the FSA than either the Law Society or RICS.

FraudBuster

Interesting reading about Lie-to-Buy mortgage brokers can be found on the links from this FSA page:

http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/090.shtml

HelpWhereIcan

While I remember and just as a friendly josh with those of you who have been feveroushly saving a deposit over the last couple of years.

When you come to use your massive deposit to buy your house that is cheaper thanks to house price falls, you may come under the same suspicions as 'lie to buy' self certers.

One of the main responsibilities we have comes under anti Money Laundering legislation.

We are required to ask ourselves if the level of deposit you are planning to pay is consistent with your income and lifestyle. This is one of the anomalies that the FSA considers too many advisers have ignored - especially on self cert cases - undeclared income, large cash deposits ... you get the picture.

i.e If you are a 26 singleton, earn £25,000 per year, have been renting a property for the last 5 years and have a deposit of £60,000 to put down, your adviser may be obliged to consider reporting your purchase as a suspicious transaction.

After all, where did all that money come from? Does this person not have friends or a social life? Do they do nothing but trawl internet forums learning how to save every last penny and arguing about the direction of house prices?

Either that or they could have a sideline as a drug dealer, escort, massuese, con man etc*

Therefore, for the sake of your future mortgage advisers, can I ask all of you to please be willing and able to show the financial papertrail of your exceptional deposits without going into tinfoil hat mode and accusing your adviser of wanting to flog you scam based investments.

Saves a lot of awkwardness all round and makes your adviser a lot less likely to report you to the appropriate people who then conduct a 'behind the scenes' investigation that the advisers never gets to hear the result of (unless it is a real result).:beer:

*unfortunately my experience is that this is the most common answer after a very generous mummy and/or daddy.

baby_boomer

Here are some of the FSA's prosecutions in October 2008:

Mortgage Introducer

"The Financial Services Authority (FSA) has fined Doncaster mortgage broker Orchid Financial Limited £34,500 for failing to ensure it provided suitable advice which exposed over 900 customers to the risk of being sold an unsuitable mortgage....."

Orchid decided to settle early on in the investigation - thus earning a 30% discount on the fine.

Mortgage Introducer

"The Financial Services Authority (FSA) has fined two directors from Abbey Mortgages Limited, based in Bexleyheath and Stokesley, £30,000 each for shortcomings in their mortgage business which put financially vulnerable customers at risk and the firm at risk of being used for mortgage fraud.

William John Evans and Gary Howes failed to check whether their [self-certified] customers had provided them with accurate information. They also neglected to check the affordability and suitability of recommended mortgage contracts, exposing their customers to the risk of receiving unsuitable advice.

The failings were so severe that the FSA has publicly censured the firm. The FSA would have fined the firm £50,000 but Abbey Mortgages Limited could not afford a financial penalty......"

No doubt these won't be the last.

The cover of this month's Mortgage Introducer has a picture of a policeman holding up a hand to Mortgage brokers with the headline - "What the regulatory bodies want from you"

PasturesNew

HelpWhereIcan wrote: »

Does this person not have friends or a social life? Do they do nothing but trawl internet forums learning how to save every last penny and arguing about the direction of house prices?

Hey - I got a mention!!

Conrad

And the FSA also state;

"Advisers can reasonably rely on VERBAL statments of income given by clients"

Far less than 1% of people will be repossessed, so whilst the clamour for tighter lending seems reasonable, lets not forget the many who would be locked out of the market as a result.

Asset ownership is the most fundamental driver of life outcomes. This is why the Government introduced the baby bond.

There are millions that dont fit the 3.5x income, with easy to evidence income mould (Daily Mail red necks never get this point).

Do we really want to put the hurdle even higher?
One day your child may face just such a hurdle. Perhaps they will be a self employed IT contractor with a very responsible attitude but unable toget a mortgage thanks to over regulation - how then will you feel?

Bank statments often do not help. Take for example the Black cabbie - why would he pay the cash he needs for his weekly household into a Bank account?
Or how about the 1 in 5 people who dont have a Bank account?

IveSeenTheLight

Point 1 is they key, Affordability.

If property is affordable having proven your disposable income, then lenders should be willing to lend. In this instance the mortgage multiplier is largely irrelevant