Arrears Fees

The latest review from the Financial Services Authority (FSA) has found continued weaknesses in the way specialist lending firms and third party administrators are handling mortgage arrears and repossessions.

Four firms have been referred to enforcement for investigation and several more firms are being assessed for referral. In many cases the FSA found a high incidence of mortgages moving straight into arrears and potential breaches of responsible lending rules. All firms investigated will be required to take action to remedy failures identified in the arrears review.

This action comes as new data on mortgage lending, published today by the FSA, shows the number of consumers facing arrears and repossessions continues to increase. It also follows two warnings by the FSA last year that failing to treat customers in arrears fairly was unacceptable. The warnings were set out in an earlier survey of arrears handling and in a letter sent to the chief executives of all mortgage lenders and administrators.

The latest review focused on specialist lenders to the impaired credit market who are no longer lending, and on third party administrators (TPAs) contracted to handle mortgage arrears and repossessions work on behalf of lenders. It also looked at arrears charges and the treatment of borrowers whose mortgages have been securitised.

The review found that poor practice was still prevalent among specialist lenders and TPAs including:

• Operating an approach focused too strongly on recovering arrears without reference to the borrower's individual circumstances;
• Being too ready to take court action;
• Imposing arrears-related charges unfairly; and
• Specialist lenders not exercising sufficient oversight of contracted TPAs.

It identified terms in securitisation covenants which could lead to inequitable treatment of borrowers in arrears, by restricting the scope for the lender to exercise flexibility and forbearance, for example by prohibiting an extension of the loan term, or conversion to interest only for a period.

Lesley Titcomb, FSA director responsible for the Mortgage Sector, said:
"In current market conditions, with our data showing more people struggling to meet their mortgage payments, it is vital that firms treat customers who get into arrears fairly. It is unacceptable that some firms are applying fees unfairly and pushing customers towards repossession without considering alternatives. The steps we are announcing today demonstrate that proper handling of arrears is still a high priority for us and will continue to be so until the necessary progress has been made.
“The focus of today’s report was specialist lending but the messages apply equally to other mortgage firms. As a result of the Dear CEO letter sent to all lenders and lenders and administrators last November, follow up action is underway with a number of firms and the industry as a whole can expect continued intensive scrutiny of its arrears handling processes."

To help firms with their mortgage and repossession handling, the FSA has outlined some examples of good and poor practice.
The FSA understands that customers in arrears are a vulnerable group who need help and advice. It has a wide range of mortgage material on the Moneymadeclear website, including the "What to do when you can’t pay your mortgage" guide, which offers practical help for people who are struggling with mortgage repayments. The FSA requires firms to send this guide to consumers who fall into arrears. Consumers who are having difficulties meeting mortgage payments should talk to their lender immediately and may also wish to contact a free independent advice agency. If a borrower believes they have been treated unfairly by their mortgage lender, they should pursue their complaint through the firm’s internal complaints procedures. If they are not satisfied with the firm’s response, they may refer the complaint to the Financial Ombudsman Service.

The arrears review is part of the FSA’s ongoing programme of work designed to monitor the effectiveness of its regulation of mortgage lending, to address key issues in the mortgage sector and to ensure that consumers are treated fairly and can make informed decisions. The issues identified during the review are being factored into the FSA’s comprehensive Mortgage Market Review on which a Discussion Paper is due to be published in September.
Source: FSA/PN/080/2009
22 June 2009

Exit Fees

You may need to pay a mortgage exit administration fee to your lender when you repay your mortgage, including if you switch mortgages for a better deal. Lenders charge the fee for the costs of the administration services involved when you end your mortgage contract with them. The fee can include costs such as deed release fees and changing the registration at the Land Registry.

The FSA were concerned that some lenders have been significantly increasing these fees recently and we thought that might be unfair. The FSA does not set prices for the products they regulate and firms can vary the amount they charge for services, such as mortgage administration. However, when a firm changes the amount it charges, the Unfair Terms in Consumer Contracts Regulations 1999 require the firm to act fairly.

Customers were being surprised by being charged more when they came to exit their mortgage than they had been told they would pay when they entered it, and these increases might not have reflected a justifiable increase in costs.

The FSA issued a Statement of Good Practice (the Statement) in January 2007 giving their view on the standards that firms should meet. We consulted the Council of Mortgage Lenders (CML) and some lenders, and issued the Statement with the agreement of the Office of Fair Trading.
In the Statement the FSA split customers into three categories:

• Future customers — customers who take out a mortgage from 1 August 2007.
• Existing customers — customers who have a mortgage, which started before 1 August 2007.
• Past customers — customers who have paid a mortgage exit administration fee in the past.