FSA savages sub-prime mortgage providers

Lenders and mortgage brokers dealing with vulnerable "sub-prime" customers were yesterday savaged by the City watchdog for failing their customers.

After reviewing 11 lenders - accounting for more than half the market - the Financial Services Authority (FSA) found that none of them "adequately covered all relevant responsible lending considerations in their policies" and "many" failed to apply even the weak policies they did have in practice.

It also said lenders' failings had led to the approval of unaffordable mortgages to some clients.

That is a particularly damning point given that "sub-prime" clients tend to be the less well off or people who have got into difficulties with credit in the past.

The regulator also blasted mortgage intermediaries after surveying 34 firms, and has launched enforcement proceedings against five. They could face heavy fines.

The FSA said that in a third of the files it reviewed there was "an inadequate assessment of consumers' ability to afford the mortgage" and in almost half there was "an inadequate assessment of the customers' suitability for the mortgages".

The watchdog also found that large numbers of customers had been advised to remortgage - to pick up fees - without providing any evidence that this would be in their best interests.

Clive Briault, FSA managing director of retail markets, said: "We are very concerned about these findings. Consumers in the sub-prime market are vulnerable people who may have high debts or a bad credit history. It is therefore important that they are properly assessed and advised. We will not hesitate to take action where we find bad practice."

He added: "The high level of sub-prime arrears in a benign market raises some important questions about the consideration given to affordability by lenders and intermediaries when undertaking this business."

The regulator also voiced concerns about lenders who advanced mortgages to people leading up to or who were in retirement. It found more than a quarter of 22 surveyed failed to comply with responsible lending requirements. The FSA was also worried that lenders offering interest-only mortgages were failing to ensure borrowers had repayment strategies in place.

Lenders said they would review the FSA's findings carefully. However, one banker said: "Hang on a second here. Ten years ago it was difficult for anyone with a sub-prime credit history to get a mortgage. The fact that you can now should be seen as a major change for the good for the consumer.

"More players have been coming into the market and that has stimulated competition and resulted in lower prices for consumers, who can now at least get a loan. If there were not sub-prime loans we would probably be up before the Treasury Select Committee, accused of cherry picking."

Michael Coogan, director general of the Council of Mortgage Lenders, said: "The sub-prime market has an important role to play in helping people with past credit problems to rehabilitate their finances. But we acknowledge that, in particular, lenders and intermediaries in the sector need to demonstrate that they are complying fully with the FSA's responsible lending guidelines."

Chris Cummings, director general of the Association of Mortgage Intermediaries (AMI) said, "The FSA reports that its research did not identify any significant evidence of sub-prime mortgages being sold incorrectly to prime customers. This is exactly what we would have expected.

"The FSA, however, identifies several issues which give cause for concern for both lenders and intermediaries. AMI does not defend poor record keeping. And we were surprised at the number of consumers paying early repayment charges to remortgage. While this doesn't necessarily indicate poor advice, we agree that documentation of the reasons for the advice must be clear.

"AMI will work with its members to address the areas of concerns raised by the FSA."