Mortgage arrears: follow up - Treasury Contents

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 July 2009.


    — 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 repossession.

    — 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 possession cases.


    — Approximately 450,000 accounts in the UK.

    — Average outstanding balance is approximately £28,000.

    — Lending in the second charge mortgage market has fallen 84% in the past 12 months, due mainly to funding constraints.

    — 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 in 2009.

    — A cross-Whitehall Review in 2008 found that there were no systemic problems in the second charge mortgage sector.


  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 in 2010.

Table 1

Q1Q2 Q3Q4Total
2009392422 4112331,458
2008364414 4553691,602
% change on previous year7.4 1.7-9.9-37.0 -9.2
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).

    — The FLA Lending Code.

    — 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 notice—including 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 this sector.

  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 move—which 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 (MRS).

 (i)   HMSS

  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 burdens—especially 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.

 (ii)   MRS

  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.

 (iii)   SMI

  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 to accrue.

March 2010

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