The City watchdog today set out new rules to help protect homeowners who fall behind with their mortgage.
The Financial Services Authority is proposing a clampdown on the charges that lenders levy on customers who are in arrears, as well as stressing that they must only consider repossessing a home as a last resort.
The latest round of proposals comes after work carried out by the FSA last summer uncovered problems with the way specialist lenders and third party administrators were handling people who fell behind with repayments.
Lenders have also come in for heavy criticism over the fees they levy on homeowners who are in arrears, with some groups charging £150 to people for a visit by a debt counsellor, or £300 for instructing a solicitor.
Borrowers can also be charged £60 a month in fees even once they have come to an arrangement with their lender about repaying the arrears.
Under today's proposals, firms will no longer be allowed to apply monthly arrears charges to consumers when they have agreed a repayment plan.
They will also not be allowed to add early repayment charges on to arrears charges or charge interest on the fees.
Any payments that consumers make must also be allocated to clearing their arrears first, before they are used to meet charges.
The FSA is also calling on firms to record all telephone calls about mortgage arrears and to keep these for three years.
The latest figures from the Council of Mortgage Lenders show that at the end of September around 194,600 people were in arrears of at least 2.5 per cent of their outstanding mortgage.
Lesley Titcomb, FSA director responsible for the mortgage sector, said: "Today's proposals underline the standards that firms must meet and will help to ensure that homeowners in financial difficulties are treated fairly.
"Lenders need to be in no doubt of their obligations to customers who fall behind with payments and must realise that such circumstances are not an opportunity to create further profits."
The FSA is also calling for all mortgage advisers and those who help to arrange mortgages, even if they do not give advice, to be accountable to the regulator and prove that they are "fit and proper".
The requirement aims to cut down on mortgage fraud after dozens of brokers have been banned by the FSA during the past couple of years, often for submitting fraudulent mortgage applications.
The Council of Mortgage Lenders (CML) said it broadly agreed with the FSA's proposals on handling customers who were in arrears, but it expressed concern that the costs for lenders of extending the approved persons regime would far exceed the potential benefits.
CML director general Michael Coogan said: "The extension of the approved persons regime to both lenders and intermediaries appears heavy-handed, at least as far as lenders are concerned, and may be a sledgehammer to crack a nut."
Today's proposals, which will be open for consultation until April 25, are part of the FSA's ongoing work to improve the mortgage market.
In October last year it outlined plans for a "more intrusive" regulation of the sector, including a ban on self-certification mortgages and loans which combine high-risk lending characteristics, while borrowers will also face tougher affordability tests.
The regulator also wants to bring buy-to-let lending and second-charge mortgages, which enable people to take out loans secured on their property, under its scope.Reuse content