The Council of Mortgage Lenders say:
In our joint submission last week with the Intermediary Mortgage Lenders Association on responsible lending and non-deposit taking institutions, we argue that non-banks (that is, lenders that provide mortgages but are not deposit-takers) could play a crucial role in the mortgage market.
They have the capacity to act as a safety valve by meeting demand for higher-risk lending while ensuring that such loans are not concentrated on the balance sheets of the deposit-taking firms that are more likely to be underpinned in a financial crisis by taxpayer support.
Unless there is a complete ban on higher risk lending in all forms, and the FSA is not proposing one, non-banks can continue to fill this valuable function, as long as regulatory rules allow.
Our submission reminded the FSA that there is little evidence to contend that non-banks encouraged deposit-taking institutions to under-price risk, or take on more of it. Non-banks, for example, were not at the forefront of some of the riskier types of lending, like offering mortgages on newly-built city centre flats or lending at loan-to-value ratios of more than 100%.
Our submission also points out that higher-risk lending does not equate with irresponsible lending. Nor should rates of mortgage arrears and possessions be seen as a guide to how successful or responsible a lender has been. Higher-risk loans will inevitably be associated with higher rates of arrears and possessions.
But if higher-risk lending is priced correctly and provided with correct controls, it can be undertaken responsibly. Non-standard credit – for example, lending to the self-employed – can help meet legitimate demand from many people that are not ‘prime’ borrowers and may otherwise be excluded from the market.
The FSA has suggested that parts of the Basel capital regime could be applied to non-banks. We believe, however, that the Basel requirements are a highly complex framework designed for deposit-takers, and that seeking to impose them on non-banks would be disproportionate.
