Memorandum submitted by the Council of
Mortgage Lenders
INTRODUCTION
1. The Council of Mortgage Lenders (CML)
welcomes the opportunity to give a written submission to the Treasury
Committee inquiry into financial inclusion. The CML is the representative
trade body for the mortgage lending industry in the UK. We have
148 members who together lend around 98% of the residential mortgages
outstanding. The industry provides funding to support home-ownership,
the private rented sector (including buy-to-let) and the social
rented sector.
2. Whilst many aspects of your inquiry fall
within the remit of other organisations and industry trade associations,
the CML has nevertheless taken an active interest in the subject
of financial inclusion, especially given three related CML objectives:
— to ensure sustainable home ownership;
— to help consumers understand risks
associated with debt; and
— help those who aspire to home ownership.
SUSTAINABLE HOME
OWNERSHIP
3. The CML continues to work to protect
consumers' housing tenure from arrears and possession despite
changes in household economic circumstances. In 1997, the Sustainable
Home Ownership (SusHo) Initiative was launched by the CML in partnership
with the Association of British Insurers (ABI) and the Government.
It seeks to work in collaboration with key stakeholders to enhance
the ability of mortgage borrowers to sustain their home ownership
and choice over the economic cycle. This mitigates risks of volatility
in the housing market destabilising the wider economy, which is
a key government concern.
4. The CML works in partnership with other
relevant organisations in achieving these objectives. Whilst developed
by the CML, the SusHo initiative formed a Partnership Steering
Group (PSG) that has representatives from the CML (as host) and
ABI (as chair), lenders, insurers and mortgage intermediaries,
the Department of Work and Pensions, Office of the Deputy Prime
Minister, HM Treasury and the FSA.
5. A significant element of the SusHo initiative
has been to improve the quality of Mortgage Payment Protection
Insurance (MPPI). This type of protection insurance is often bought
as an add-on product to a mortgage and is designed to protect
mortgage payments in the event of accident, sickness and unemployment.
To improve the quality of products offered to consumers, the CML
and ABI developed a minimum baseline product standard to ensure
all policies offered provide adequate protection. This baseline
was introduced in 1998 and has helped to improved confidence in
the MPPI market: CML statistics show the increasing take-up of
MPPI to 23% of residential mortgages outstanding and to around
27% of new mortgages sold. Only 1.7% of all policies in force
made a claim in H12005, of which 87% of claims were granted and
paid.
6. The CML is currently undergoing a detailed
review of the MPPI Baseline. This is being conducted in the light
of developments in the both in the MPPI market, the protection
insurance market, arrears and possessions trends, and the wider
economy. It examines key areas of MPPI including:
— products available including coverage
and exclusions;
— claims handling and administration.
7. The aim of which is to improve the quality
of products offered, and ensure these policies are bought by customers
rather than sold to them. This review started in 2004, and since
then the broader payment protection insurance market has come
under scrutiny by parallel FSA and the OFT investigations. Observations
from these investigations are being taken into account in the
Baseline review, though it is notable that the FSA Thematic Study
released on 3 November 2005 found that the prime regular-premium
MPPI market does "not represent a high risk to [the FSA's]
regulatory objectives" (FSA PPI Thematic Research Findings,
p9).
8. In addition to our work on MPPI, the
CML has also through the SusHo initiative:
(a) worked with the FSA in publishing a
leaflet `You Can Afford Your Mortgage Now But What If?', resulting
in the distribution of over one million copies;
(b) published a sample risk assessment for
use by lenders/borrowers;
(c) published the Repossession Risk Review,
a yearly report which examines trends in sustainability indicators;
(d) persuaded the DWP to amend the standard
rate for Income Support for Mortgage Interest (ISMI) to make it
more representative of the interest rates charged by mortgage
lenders;
(e) worked with the ABI to improve MPPI
claims handling procedures; and
(f) published research by the University
of York on safety nets for borrowers.
FINANCIAL CAPABILITY
9. Consistent with its interest in creating
a sounder retail financial services market by empowering consumers,
the CML actively participates in the Financial Service Authority's
Financial Capability Strategy by chairing its Borrowing Working
Group. This was formed in 2004 and after considering extensive
research on the issue of debt and borrowing. The group resolved
to focus on debt prevention and helping those consumers on the
cusp of financial difficulties.
10. A key deliverable of the Borrowing Working
Group is the Debt Test, an interactive borrowing tool that helps
consumers assess their borrowing levels through a multi-phased
series of questions. After a strand of work conducted by the Borrowing
Group members over 2005, the FSA has now taken forward the development
of the tool, which was launched on the BBC website http://news.bbc.co.uk/1/shared/spl/hi/business/debtcheck/html/index.stm
and on the FSA website www.fsa.gov.uk/consumer/debt_test going
live today. It asks 13 questions about the user's budget and borrowing
situation, and then assesses the user's risk of overindebtedness,
and gives feedback synopsis offering some basic advice, plus detailed
sections offering:
— suggestions on what the consumer
should do immediately;
— suggestions on whether the user
should borrow more and how;
— suggestions on making the most of
their money;
— and how to regularly review the
user's position; and
— signposts to further help, including
links to other sites such as the BBC Financial Healthcheck, Experian,
Citizen's Advice, and the Consumer Credit Counselling Service.
IMPROVED ACCESS
TO HOME
OWNERSHIP
11. The CML and the mortgage industry have
worked to create schemes allowing consumers to access the benefits
of home ownership. As part of the pre-Budget announcement the
Chancellor confirmed that privately-financed equity loans will
be available from October 2006 to potentially double the number
of aspiring first-time buyers who could potentially be helped
through the government's Open Market HomeBuy scheme.
12. The government already planned to offer
more than 20,000 Open Market HomeBuy equity loans between 2005
and 2010. But with lenders part-funding equity loans, the number
could now be up to 40,000. Under Open Market HomeBuy, the borrower
will get a 75% mortgage, a 12.5% equity loan from the same lender,
and a 12.5% equity loan from the government. The costs will be
in line with existing low-cost home-ownership schemes. Those eligible
to apply will be key workers, social tenants, those on the housing
register and other first-time buyers identified as priorities
by regional housing boards.
HOME IMPROVEMENT
AND SOCIAL
HOUSING
13. Local housing authorities now have a
broad power to provide financial and other assistance for home
repair and improvement. This has meant that grants are only rarely
available and people are being encouraged to take out loans to
carry out home improvements.
14. The CML has helped where it can. However,
it should be noted that many lenders are often reluctant to get
involved as these are often small loans to people who have limited
ability to pay, with a disproportionate amount of administration
involved. Some non-profit organisations including housing associations
and other special purpose vehicles are developing to provide assistance
to these people. However, progress is slow as highlighted by a
recent Joseph Rowntree Foundation report for the Office of the
Deputy Prime Minister (ODPM) "Implementing new powers
for private sector renewal". The report concluded that
unless private finance can be more effectively levered in to private
sector renewal programmes it is difficult to see how local authorities
can meet their obligations. Given that areas of poor housing are
often linked to low incomes, this is an area where there is a
risk of financial exclusion.
15. CML has also taken social housing matters
very seriously, and its members have loaned over £36 billion
for new build, repair and improvement in this area.
CONCLUSION
16. The CML is overall not complacent in
the issue of financial inclusion and can demonstrate a commitment
towards improving consumer capability with respect to borrowing
generally and mortgages in particular, and continues to explore
new related initiatives in other mortgage related areas.
17. This response has been prepared by the
CML in consultation with its members.
January 2006
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