This is a brief summary of the main points relating to the statutory scheme for the regulation of the mortgage business:
The Financial Services and Markets Act 2000 (FSMA) imposed upon the Financial Services Authority (FSA) certain statutory and strategic objectives, including an obligation to provide an effective regulatory regime, aimed at maintaining market confidence and promoting public understanding in all aspects of financial services
In practice the FSA has achieved this through the publication of a detailed set of rules, regulations and guidance known as the FSA Handbook. The Handbook is divided into blocks and each block is divided into modules. The full Handbook together with additions and amendments from time to time can be viewed online at the FSAs website www.fsa.gov.uk/Pages/Handbook
Regulation extended to the mortgage industry on 31st October 2004 (M-Day) see now the Mortgage: Conduct of Business Rules (MCOB), which forms part of the Business Standards in the FSA Handbook.
MCOB applies to every firm that carries on regulated mortgage activities.
There are four different types of firm: mortgage lenders, mortgage administrators, mortgage arrangers and mortgage advisers. A single firm may fall into more than one of these types.
Regulated mortgage activities comprise the different activities listed in MCOB 1 Annex 1 being carried out in relation to a regulated mortgage contract
The simple meaning of regulated mortgage contract is that it is a loan on the security of a first legal mortgage on land in the United Kingdom of which at least 40% is used as or in connection with a dwelling by the borrower. For the full definition, see the Glossary.
MCOB applies to business loans secured on residential property by way of a regulated mortgage contract (other than to a large business customer), but it does not apply to a loan secured on property that is used for business purposes. See MCOB 1.2.3 1.2.6.
In terms of selling requirements, the new regime means that:
Borrowers will get clear information about mortgages and mortgage services in a standard keyfacts format. This makes it easier to compare mortgages and services from different lenders.As to the detail, MCOB 2 7 contain the broad scheme of regulation extending over the whole range of mortgage selling, and impose detailed requirements as to the form and content of communication and financial promotion; the conduct of advising and selling; disclosure of information; the terms of offer documents including the requirement to give illustrations; having regard to the interests of customers and the duty to treat them fairly; and the duty to keep records (with supplemental provisions in MCOB Sched 1) etc.
Price information (including the APR) in any mortgage advertising and marketing material must be clear.
When a borrower receives advice from a firm they must make sure that they recommend a suitable mortgage based on the borrowers needs and circumstances.
Charges must not be excessive
There are new standards offering greater protection to borrowers if they get into arrears.
MCOB 8 and 9 make special provision in respect of Lifetime Mortgages (equity release schemes)
MCOB 10 contains detailed provision for the calculation of the Annual Percentage Rate and Total Charge for Credit, and applies the identical provisions of the Consumer Credit (Total Charge for Credit) Regulations 1980
MCOB 11 contains some important duties that extend the requirement in MCOB 6 to treat customers fairly. It imposes a two-fold duty of responsible lending:
(a) to take account of a customer's ability to repay before deciding to enter into a regulated mortgage contract or make a further advance on a regulated mortgage contract (and to keep an adequate record to demonstrate that it has taken account of this) (MCOB 11.3.1); andMCOB 11.2.1 states The FSA regards it as important that customers should not be exploited by firms that lend in circumstances where they are self-evidently unable to repay through income and yet have no alternative means of repayment.
(b) to put in place and keep up to date a written policy setting out the factors it will take into account in assessing a customers ability to repay (MCOB 11.3.4)
MCOB 11.3.2 also deals with the tricky problem of self-certification mortgages (it may still be relied upon if considered appropriate).
MCOB 12 tackles the problem of charges. It begins by acknowledging that the level of charges under a regulated mortgage contract is not typically a matter for regulation. It emphasises the need for transparency and identifies four particular circumstances in which customers should be protected from unfair and excessive charging practices, where:
(a) the charges imposed upon a customer seeking to terminate a regulated mortgage contract before the end of the term of the contract do not reflect the cost of termination to the firm;
(b) the charges imposed on a customer in payment difficulties are not based upon the costs incurred by the firm;
(c) the charges (including rates of interest) imposed on a customer under a regulated mortgage contract are excessive and contrary to the customer's interests; and
(d) the charges made to a customer in connection with a firm entering into or making a further advance on a regulated mortgage contract or administering a regulated mortgage contract, or arranging or advising on a regulated mortgage contract or a variation to the terms of a regulated mortgage contract are excessive.
MCOB 13: Arrears and repossessions is of particular importance in the context of mortgage litigation:
Who does it apply to?
Mortgage lenders and mortgage administrators (and firms that were mortgage lenders or mortgage administrators before the sale of a repossessed property took place).
What does it do?
It applies the provisions of MCOB 13 with respect to administering a regulated mortgage contract, and administering a mortgage shortfall debt
It amplifies MCOB 6 (duty to treat customers fairly) in respect of the information and service provided to customers who have payment difficulties or face a mortgage shortfall debt
13.3 Dealing fairly with customers in arrears: policy and procedures
(1) A firm must deal fairly with any customer who:
is in arrears on a regulated mortgage contract; or
has a mortgage shortfall debt
(2) A firm must put in place, and operate in accordance with, a written policy (agreed by its respective governing body) and procedures for complying with (1).
13.3.2 Policy and procedures: content
A firm should ensure that its written policy and procedures include:
(a) using reasonable efforts to reach an agreement with a customer over the method of repaying any payment shortfall or mortgage shortfall debt, in the case of the former having regard to the desirability of agreeing with the customer an alternative to taking possession of the property;
(b) liaising, if the customer makes arrangements for this, with a third party source of advice regarding the payment shortfall or mortgage shortfall debt;
(c) adopting a reasonable approach to the time over which the payment shortfall or mortgage shortfall debt should be repaid, having particular regard to the need to establish, where feasible, a payment plan which is practical in terms of the circumstances of the customer;
(d) granting, unless it has good reason not to do so, a customer's request for a change to:
(i) the date on which the payment is due (providing it is within the same payment period); or
(ii) the method by which payment is made;
and giving the customer a written explanation of its reasons if it refuses the request;
(e) giving consideration, where no reasonable payment arrangement can be made, to the customer being allowed to remain in possession to effect a sale; and
(f) repossessing the property only where all other reasonable attempts to resolve the position have failed.
13.3.9 Record keeping: arrears and repossessions
(1) A firm must make and retain an adequate record of its dealings with a customer whose account is in arrears or who has a mortgage shortfall debt, which will enable the firm to show its compliance with MCOB 13.4 (Arrears: provision of information to the customer), MCOB 13.5 (Dealing with a customer in arrears or with a mortgage shortfall debt) and MCOB 13.6 (Repossessions).
(2) A firm must retain the record required by (1) for a year from the date on which the relevant payment shortfall or mortgage shortfall debt was cleared.
13.4 Arrears: provision of information to the customer
If a customer falls into arrears on a regulated mortgage contract, a firm must as soon as possible, and in any event within 15 business days of becoming aware of that fact, provide the customer with the following in a durable medium:
(1) the current FSA information sheet on mortgage arrears;
(2) a list of the due payments either missed or only paid in part;
(3) the total sum of the payment shortfall;
(4) the charges incurred as a result of the payment shortfall;
(5) the total outstanding debt, excluding charges that may be added on redemption; and
(6) an indication of the nature (and where possible the level) of charges the customer is likely to incur unless the payment shortfall is cleared.
13.4.4 Customers in arrears within the past 12 months
If a customer's account has previously fallen into arrears within the past 12 months (and at that time the customer received the disclosure required by MCOB 13.4.1 R), the arrears have been cleared and the customer's account falls into arrears on a subsequent occasion a firm must either:
(1) issue a further disclosure in compliance with MCOB 13.4.1 R; or
(2) provide a statement, in a durable medium, of the payments due, the actual payment shortfall, any charges incurred and the total outstanding debt excluding any charges that may be added on redemption, together with information as to the consequences, including repossession, if the payment shortfall is not cleared.
13.4.5 Steps required before action for repossession
Before commencing action for repossession, a firm must:
(1) provide a written update of the information required by MCOB 13.4.1 R(2), (3), (4), (5) and (6);
(2) ensure that the customer is informed of the need to contact the local authority to establish whether the customer is eligible for local authority housing after his property is repossessed; and
(3) clearly state the action that will be taken with regard to repossession.
13.5 Dealing with a customer in arrears or with a mortgage shortfall debt
13.5.1 Statement of charges
Where an account is in arrears, and the payment shortfall or mortgage shortfall debt is attracting charges, a firm must provide the customer with a regular written statement (at least once a quarter) of the payments due, the actual payment shortfall, the charges incurred and the debt.
13.5.3 Pressure on customers
A firm must not put pressure on a customer through excessive telephone calls or correspondence, or by contact at an unreasonable hour.
A firm must ensure that, whenever a property is repossessed (whether voluntarily or through legal action) and it administers the regulated mortgage contract in respect of that property, steps are taken to:
(1) market the property for sale as soon as possible; and
(2) obtain the best price that might reasonably be paid, taking account of factors such as market conditions as well as the continuing increase in the amount owed by the customer under the regulated mortgage contract.
13.6.3 If the proceeds of sale are less than the debt
(1) A firm must ensure that, as soon as possible after the sale of a repossessed property, if the proceeds of sale are less than the amount of the customer's debt, the customer is informed in a durable medium of:
(a) the mortgage shortfall debt; and
(b) where relevant, the fact that the mortgage shortfall debt may be pursued by another company (for example, a mortgage indemnity insurer).
(2) If the decision is made to recover the mortgage shortfall debt, the firm must ensure that the customer is notified of this intention.
The notification referred to in (1) must take place within five years of the date of the sale (if the regulated mortgage contract is subject to Scottish law) or within six years (in all other cases).
13.6.6 If the proceeds of sale are more than the debt
A firm must ensure that, on the sale of a repossessed property, if the proceeds of sale are more than the amount of the customer's debt, reasonable steps are taken, as soon as possible after the sale, to inform the customer in a durable medium of the surplus and, subject to the rights of any subsequent mortgage or charge holders, to pay it to him.
13.7 Business loans
Where the regulated mortgage contract is for a business purpose, a firm may as an alternative to MCOB 13.4.1 R(1) provide the following information in a durable medium instead of the FSA information sheet on mortgage arrears:
(1) details of the consequences if the payment shortfall is not cleared;
(2) a description of the options available to the customer for clearing the payment shortfall; and
(3) details of sources of fee-free advice for business customers.
The Financial Ombudsman Service
This was set up under Part XVI of the FSMA. The service is provided to help settle individual disputes between customers and financial firms in relation to the provision of a range of financial services, including mortgages and related investments and insurances.
For a useful summary of some of the problem cases investigated by the FOS, see the article by Michael J Wilson On Mortgages, Solicitors Journal 2005, Vol 149 No 15 p 445 (15th April 05)
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