As we head towards 2016, lenders and intermediaries should be rebuilding their processes and procedures to accommodate new timelines, new forms and new reporting requirements.
With the clock ticking towards April next year, it is worth taking a look in more detail at the key areasof change that we need to be ready for.
European Standardised Information Sheet (ESIS)
This new form must be used for all loans secured by way of a charge on a consumer’s home.
In the UK mortgagemarket this will replace the well-established Key Facts Information (KFI) sheet and there will be a period of transition. The two documents are very broadly similar and are both designed to provide the prospective borrower with information to make a balanced decision about the finance they are being offered.
The transition will no doubt be slightly disruptive for customers, brokers and lenders but in essence it is simply replacing one form with another.
Whilst in the secured loan sector the introduction of the ESIS is a bigger change, in some ways it will be a simpler one as it represents a completely new step in the process. And, by setting a standard document for providing the customer with information, it can only help to make sure that prospective borrowers receive the information they will need to consider the finance.
Brokers and lenders are now working together to plan how this form will be producedand how the transition period will work as the new legislation lands. The FCA has provided an example illustration along with the recent results from their consultation so brokers and lenders have an idea of what is expected.Such challenges as to the exact content of the ESIS, who will issue it and when it will be issued have yet to be set it stone.
Binding Offer
Similarly to the ESIS replacing the KFI the concept of an ‘offer’ has been established in the mortgage market for many years and is a commonly accepted practice. The introduction of a ‘Binding Offer’ will also require changes and a period of transition in the first mortgage market. In second mortgages however the concept of an offer is new.
The introduction of a ‘Binding Offer’ will require a significant change to the process in the second mortgage market. This change should, however ensure a more robust underwriting process is undertaken at an early stage in the interaction with a new customer. Whilst the FCA hasacknowledged that brokers and lenders can still issue ‘non-binding’ offers they have been clear on what is expected once an offer is ‘binding’.
Goodbye Consideration it’s time to ‘Reflect’
Currently prospective secured loan borrowers must be given a clear 16 day consideration period during which neither broker nor lender can contact the customer, other than to provide copy documents for signature at the relevant time.
This process was initially designed to ensure that customers did not feel under pressure when making important and significant decisions about borrowing money. However it is somewhat outdated and potentially causes unnecessary delays for customers who are looking to raise funds quickly.
For first and second mortgages a ‘Reflection Period’ is being introduced where the customer must be given a period of at least 7 days to reflect on the ‘binding offer’. During this period the customer can accept the offer at any time, thereby ending the reflection period.
Reversing the position over the ESIS, this change is something completely new for 1st mortgages, but an alteration to an existing process for 2nds. The FCA have given some flexibility around when the period for reflection can be granted to the customer, pre or post sale and will be interesting to see which process is adopted and does the market as a whole lean toward one way of doing things.
Upfront Fees
Currently when processing a secured loan for a customer, legislation dictates that a broker cannot charge the customer any upfront fees to cover the costs associated with the processing the application, such as the valuation, the mortgage reference, credit checks etc., even if the customer cancels their application before it completes.
The new legislation will allow a second mortgage broker to charge a fee for their services upfront – in the same way as a mortgage advisor or lender can currently (for example to cover a valuation). That is not to say all secured loan brokers will choose to charge a fee but it does provide an option to do so.
Creditworthiness
As is well documented in the media and under constant scrutiny, brokers and lenders alike need to make sure that any 1st mortgage is affordable to the borrower. Affordability and general customer suitability to borrow money all now sit under the banner of Creditworthiness Assessment Requirements. These requirements are designed to protect the consumer from future changes in the lending industry and in particular to protect against future rate rises.
Currently the requirements on second charge mortgage brokers and lenders are different to those in the 1st mortgage market but under the new legislation the two will be much more closely aligned. The FCA have clarified that second mortgage applications will need to undergo the same interest rate stress tests before approval is given. So second charge lenders will have to assess creditworthiness by stress testing both their mortgage and secured loan against a future 3% increase in base rate.
These are, for me, some of the most significant and potentially disruptive changes that will affect the way secured loans are assessed and processed and therefore require careful thought and planning from all in the second mortgage industry.
