Written evidence submitted by the Finance
and Leasing Association
1. The Finance and Leasing Association (FLA)
is the leading trade association for the second charge mortgage
market, and represents around 85% of the industry. Second charge
lenders include subsidiaries of some of the major banks and building
societies, as well as independent financial organisations.
2. We welcome the opportunity of providing
further evidence to the Treasury Select Committee looking at households
affected by the recession and struggling with mortgage arrears
and/or at risk of possession. This paper updates the detailed
evidence we provided during the initial stages of the review in
Second charge lenders remain committed
to helping customers in financial difficulties and to taking possession
only as a last resort. This is reflected in the latest data reporting
1,458 possessions in 2009.
A recent report by Shelter found no evidence
that second charge lenders were taking a pro-active approach to
The Mortgage Rescue Scheme is actively
supported by second charge lenders.
The FLA and CML have introduced a new
initiative aimed at preventing duplicate costs for borrowers in
Approximately 450,000 accounts in the
Average outstanding balance is approximately
Lending in the second charge mortgage
market has fallen 84% in the past 12 months, due mainly to funding
Consumer demand remains strong.
At least 70%-75% of second charge mortgages
include some form of debt consolidation, helping customers repay
debts at lower and more affordable interest rates.
1,458 properties were taken into possession
A cross-Whitehall Review in 2008 found
that there were no systemic problems in the second charge mortgage
3. Second charge lenders only take possession
as a last resort and this is reflected in the most recent industry
statistics. In the final quarter of 2009, second-charge mortgage
lenders repossessed 233 properties, which was 37% lower than in
the same period a year earlier. The Q4 figure means that second-charge
mortgage lenders repossessed 1,458 properties in 2009, 9.2% down
on 2008, and below than the FLA's original forecast of 1,522.
4. The fragility of the UK's emergence from
recession, and the continued high level of unemployment mean many
borrowers continue to face difficulties in meeting their financial
commitments. This could mean a rise in the number of repossessions
THE NUMBER OF ACTUAL PROPERTIES TAKEN INTO
POSSESSION BY FLA SECOND MORTGAGE PROVIDERS1
|% change on previous year||7.4
| 1 Possession proceedings arising from FLA members' second mortgage books, which have led to actual possession by the second mortgage provider.
5. Second charge lenders must comply with a broad range
of legislative requirements and good practice standards when helping
customers in financial difficulties. These include:
The Consumer Credit Act 1974 (as amended).
FLA Good Practice Guidelines for Second Charge Lenders
and customers in financial difficulties.
OFT Guidance for Second Charge Lenders 2009.
Mortgage Possession Pre-Action Protocol.
6. Over the past 18 months, second charge lenders have
extended further forbearance to customers with debt problems due
to the economic climate. This has primarily involved arranging
alternative payment plans with customers, allowing them to change
their payments in the interim.
7. There are also very strong commercial reasons why
second charge lenders only seek possession in the very last instance.
When a property is repossessed, the first mortgage, together with
any fees and charges levied by the first charge mortgage lender,
take a priority share of the proceeds of sale. This often means
that a second charge lender does not recover the full amount of
the mortgage. Second charge lenders therefore want to work with
their customers to reach alternative payment arrangements, which
will keep the customer in their home.
(i) Further regulatory reform
8. In March 2010, the Office of Fair Trading (regulator
for the second charge mortgage market) will introduce further
industry guidance for both secured and unsecured lending which
is aimed at preventing irresponsible lending. This guidance will
include requirements when helping customers with repayment problems.
The content of the guidance is currently being finalised, following
an extensive consultation exercise.
(ii) Preventing duplicate costs for customers
9. Customers facing repossession can sometimes have both
a first and second charge mortgage with different lenders. Over
the past six months, the FLA and the CML have been working together
to improve the exchange of information between first and second
charge lenders in possession cases. This is to prevent situations
where a first and second charge lender may both be taking possession
of the same property, which would result in duplicate costs for
the borrower. From April 2010, lenders will exchange information
just prior to commencing action, to prevent duplicate actions
in the future. This initiative has been supported by the Government's
Home Finance Forum which includes both lenders and advice groups.
10. In addition to this industry initiative, from April
2010 the Civil Procedure Rules will be changed to require a lender
taking possession to serve notice of this fact on all other lenders
with a mortgage against the property. Therefore while the FLA/CML
initiative will put other lenders on notice of legal action just
prior to it being commenced, the changes to the Civil Procedure
Rules will ensure that all lenders provide such noticeincluding
those who may not be members of the two trade associations.
11. Second charge lenders are regulated by the OFT and
not the FSA and therefore the MMR does not specifically deal with
12. The future regulation of the second charge market
is currently under review by the Treasury, with the suggestion
that regulation is transferred to the FSA. The second charge lending
industry is not opposed to FSA regulation, but believes there
must be a strong case for such a movewhich has not been
made as yet.
13. The second charge mortgage industry is regulated
under the Consumer Credit Act 1974 (amended in 2006) and the FLA's
Lending Code. All lenders are also licensed under the Office of
Fair Trading's Consumer Credit Licensing Regime and must adhere
to the legislative requirements for licence holders, including
the statutory Fitness Test.
14. Second charge lenders must also comply with the OFT's
Guidance for Second Charge Lenders and Brokers published in July
2009. This Guidance provides a comprehensive approach to good
practice standards across the entire life-cycle of a second charge
mortgage, ranging from the checks a lender must undertake when
offering a mortgage through to how lenders should assist customers
in financial difficulties. The Guidance also states that, where
appropriate, lenders should act with forbearance with a view to
enabling the borrower to remedy the position, for example by freezing
interest and other charges for a period, or allowing deferred
payment of arrears.
15. Over the past 12 months, second charge lenders have
been directly involved in the development both the Home Owner
Mortgage Support Scheme (HMSS) and the Mortgage Rescue Scheme
16. With regard to HMSS, while some second charge lenders
are involved in the Government's scheme, others are adopting procedures
which follow the principles of the scheme. In practice, some lenders
have found that the scheme can present significant administrative
burdensespecially for smaller and medium-sized lenders
and therefore offering arrangements which adhere to the aims of
the scheme has proved to be just as effective in delivering real
help to customers in difficulties.
17. Second charge lenders are participating extensively
in the MRS. Lenders have particularly welcomed the introduction
of new Fast Track process, which has significantly reduced some
of the delay and administration evident in the original scheme.
18. In January 2010, second charge lenders hosted a workshop
with the MRS Team to identify how they can work more effectively
together. This has resulted in a questionnaire being completed
by second charge lenders, setting out key contact points and policy
approaches to improve communication further.
19. Support for Mortgage Interest (SMI) is an important
part of the Government's support for customers in financial difficulties,
but it is only available to customers with first charge mortgages
and not second charge loans. This presents a major gap in consumer
protection. The extension of SMI to second charge mortgages would
deliver real help to customers struggling with their repayments,
who are at risk of losing their home.
(iv) Future Safety Nets
20. To help prevent possession action in the future,
there is a need for concerted work between Government and the
industry to develop effective safety nets for home owners which
are both affordable and reliable.
21. While there has been considerable comment on PPI
over the past 12 months, the fact remains that over 80% of claims
on PPI sold by FLA members are successful and directly help customers.
But with many lenders moving away from providing insurance, further
work is required in looking at how sustainable borrowing can be
achieved over the economic cycle.
22. Second charge lenders recognise the difficulties which
face tenants of mortgaged properties, who might be unaware that
possession action is being taken.
23. While the Mortgage Repossessions (Tenant Protection)
Bill is aimed at allowing undisclosed tenants two months to find
alternative accommodation just prior to possession being taken,
the Bill does not make it clear that only a single two month period
can be requested. We remain concerned that this could be open
to abuse by tenants who seek to make multiple applications and,
in the interim, the borrower's outstanding debt will continue