The city watchdog has drafted a sweeping package of new protections for homeowners amid concerns that future rises in interest rates could trigger a boom in mortgage arrears.
The Financial Services Authority (FSA) has ordered lenders and brokers to treat repossession as "a last resort" that should only be used after every possible option has been explored.
Customers who have entered into a repayment agreement must not face arrears charges, while all firms will have to record telephone calls about arrears and can keep records of the conversations for at least three years.
Payments from struggling borrowers must be allocated to the home loan first – any arrears charges racked up will have to be paid off later.
The sale of mortgages is also being tightened up with mortgage advisers told that they must become "approved persons" registered with the FSA so they can be individually monitored.
The regulator has further introduced new rules to tighten up "sale-and-rent-back" agreements where borrowers who can not keep up repayments agree to sell their homes but stay on as tenants.
They will now have to be given security of tenure for at least five years. "Exploitative advertising and high-pressure sales techniques" are also being banned while there is to be a new prohibition on the use of "emotive terms" such as "fast sale", "mortgage rescue" and "cash quickly" in promotional literature.
A 14-day cooling-off period to give consumers more time to make decisions on sale-and-rent-back is being introduced together with a ban on cold-calling and the use of maildrops promoting sale-and-rent-back. Risks will be clearly signposted to the customer, via FSA literature and during the home sale process. Lesley Titcomb, the FSA director responsible for the mortgage sector, said: "With cases of vulnerable homeowners evicted from their homes after 6-12 months after selling to unscrupulous sale-and-rent-back companies, tighter controls were vital.
"Sale-and-rent-back is often used by those who want to sell in a hurry to stay in their home, and so it is vital that they are better protected during what is usually a difficult period financially."
She added: "We also think it is wrong that arrears charges should be taken from customers already in difficult circumstances and trying to get their finances back on track. Today's rules make absolutely clear the standards we expect of firms, and we have already taken tough action against some of the worst offenders."
The Council of Mortgage Lenders (CML) argued that "most of" the proposals already reflect lenders' current practice. It said yesterday: "The CML is pleased that smaller firms with low levels of arrears cases will be able to apply for a waiver from the more draconian call-recording requirements that would otherwise impose disproportionate costs and bureaucracy on some lenders." It also "welcomed" the moves on sale-and-rent-back.Reuse content