INTEREST-ONLYDEALING FAIRLY WITH INTEREST-ONLY MORTGAGE

CUSTOMERS: A GOOD PRACTICE GUIDE FROM HML

REVIEW THE FCA’S GOOD PRACTICE GUIDELINES FROM THE FINALISED GUIDANCE

The FCA’s finalised guidance is an easy-to-read document that makes clear exactly what it views as good practice. Using the table on the next page, which notes the different good practice strategies, lenders can cross-reference this against their implementation plan to ensure it meets all of the requirements that are identified in the finalised guidance. In addition, conducting a gap analysis will identify if and where further work is required to ensure all of the FCA’s good practice requirements are met.

The Financial Conduct Authority (FCA) published its interest-only finalised guidance on August 29th 2013, which detailed what it views as good practice from lenders in dealing with borrowers with these types of mortgages who may be at risk of being unable to repay their loan.

This step-by-step good practice guide details what lenders should be doing to deliver their interest-only customer communication strategies. HML is available to support you with interest-only customer servicing, so please feel free to get in touch to discuss your needs.

Post MMR, HML will continue to refine itsservice to ensure it continues to meetFCA guidelines, mitigates conductrisk and ensures a qualitycustomer experience andappropriate customer outcomes.

Governance

A written strategy detailing the procedural and policy framework for the management of

expired term interest-only mortgages

Document reasons why lenders haven’t offered

customers certain options

Interest-only strategy options

Switch to full or part capital repayment with customer

agreement after an affordability check

Overpayments

Mortgage term extension where appropriate

Waive normal fees and charges for customers changing to alternative products or repayments

Where options are agreed verbally follow up in writing

Documented guidance

framework

Front-line staff to have a written policy and procedural guidance

to ensure a consistentapproach

Give customers (both before and after maturity)

appropriate options

Assess customer’s ability to pay should the mortgage

extend into retirement or varying the mortgage term

increases repayments

Repossession action is a last resort

A defined criteria is in place for mortgage product and/

or interest rate change

Regular reviews of a customer’s circumstances

when forbearance measures are in place

Appropriately trained staff to deal with customers

Management Information

Communications strategy responses

Options deployed before and after term maturity

Post-maturity rolling options

Post-maturity arrears, litigation and repossession

Predictive data including payment behaviours

Collate information to capture current repayment

strategies for existing interest-only customers, which should be used to

develop the firm’s interest-only strategy

Communications prior to maturity

Regular and earlier customer contact

communications strategy,with more regular

communications as they approach the end of the

mortgage term

Set out options for customers concerned about

repaying their mortgage

A simple process

A helpline with opening times noted

Inform customers of free impartial or independent

advice services

Provide a balanced position including risks

of inaction

Communications tailored to individuals

Communications reviews to improve customer

engagement

Communications followed by telephone campaigns

Communications which take into account alternative repayment strategies, such

as downsizing

Requests for proof of repayment strategies are

proportionate and balanced

Communications adapted for customers currently in forbearance arrangements

or arrears

Online access to income and expenditure tool

Encourage customers to contact the firm to agree a

resolution after maturity

Communications post maturity

Communications which encourage customers to

contact lender

LIST THE OPTIONS YOU OFFER YOUR INTEREST-ONLY CUSTOMERS TO REPAY THEIR MORTGAGE

The FCA lists several repayment options that are good practice to offer to customers if appropriate to their circumstances. These include converting to part or full repayment, extending the mortgage term and accepting overpayments.

Lenders should identify the options that they currently offer or are prepared to offer and note any additional borrower criteria that need to be considered, such as whether it is appropriate for the term to be extended beyond normalretirement age.

From April 2014, customer communications must adhere to the MMR advice rules in relation to contract variations.

While the FCA lists several repayment options, this step presents the opportunity to develop innovative products and services, such as improved product rates, equity release, shared partnership mortgages and assisted voluntary sales.

DECIDE HOW YOU WILL DEAL WITH CUSTOMERS POST-MATURITY

Lenders need to be aware that some customers will need to be contacted post-maturity and be encouraged to engage with their loan provider regarding the repayment of their loan. The outcomes lenders wish to implement for customers with matured interest-only mortgages need to be defined and procedures documented. Some of the tasks that may be involved include establishing robust supplier arrangements, such as with solicitors, asset managers and field agents, and altering the content of letter templates and call scripts.

DECIDE WHAT INFORMATION YOU NEED FROM YOUR CUSTOMERS

The tone and quality of customer communications will set the scene for successful customer engagement. HML has developed call scripts and letter templates for several client customer contact campaigns, with information currentlycollected including:

• Whetherthecustomerhasarepaymentplan• Whattherepaymentplanis• Istherepaymentplansufficienttocleartheloan–howdoesthecustomer plan to repay any shortfall• Anyadditionalinformationregardingtheplan,includingitsvalueand when it matures

In circumstances where the customer isn’t able to repay their loan, an affordability assessment should be carried out to determine the appropriate optionsavailable to them.

DEVELOP A WAY TO CAPTURE DATA

HML has developed a customer repayment strategy screen on its iCONNECT system to capture information about repayment plans. The majority of information that is collected is produced in a measurable format to allow for the effective reporting of a mortgage lender’s portfolio.

It is useful to compare customers’ responses to their risk parameters, such as their age, LTV, remaining balance and the remaining term. This creates a clearer picture of each customer and how they should be categorised in terms of communication priorities and the risk of them not repaying their loan at the end of its term.

HML has also developed analytics that will identify the risks within the firm’s portfolio, which generates a scorecard at individual account and portfolio level. This is in-line with the FCA’s guidance, which suggests firms should create predictive data and probability-to-repay indicators.

The customer’s mortgage file should have a clear audit trail of the deployment of options which evidences which options have been considered and if any were not offered to the customer and the reasons why.

DECIDE HOW OFTEN YOU NEED TO CONTACT YOUR CUSTOMERS AND HOW

The FCA has recommended in the first instance that lenders need to contact all of their interest-only customers with mortgages that mature prior to or in 2020 before April 2014. However, HML has found through pilot studies and customer contact campaigns that getting in touch with an entire interest-only portfolio instigates wider action. In our experience, the greater proportion of customers who instigate a conversion to part or full repayment have a term expiry of approximately 20 years remaining.

We have used a combination of letters and phone calls to maximise customer engagement and have worked with clients to produce a contact timeline based on the term expiry date. Based on this date, we state within the contact timeline whether just a letter is required, or also follow-up telephone calls.

If a customer confirms they have a repayment plan in place, our iCONNECT repayment screen can be updated to ensure these individuals are not unnecessarily contacted, ensuring a quality experience and favourableoutcomes for the customer.

REVIEW YOUR OVERALL OBJECTIVES AND HOW YOU INTEND TO DEPLOY THESE

Working back through the steps above, a high-level policy document can now be created which includes all of a lender’s objectives. Information contained within this document can include what interest-only repayment options are available, who these options are available to and when and how customers should be contacted. This can be shared with front-line staff to ensure communications are tailored towards a customer’s individual needs.

Lenders need to review the deployment of their interest-only repayment options and assess whether they have performed as expected.

Consideration should also be given to how lenders manage their existing contract variation processes, such as waiving the usual fees that would apply when changing the repayment type.

DECIDE HOW TO TRAIN YOUR STAFF AND MAINTAIN SERVICE QUALITY

HML has dedicated staff who are trained to respond to interest-only client-specific needs and who have the required experience and skillset. We also have a dedicated helpline for customers to access. In addition, process flows, call scripts, letter templates, quality assurance checks and a training academy have all been established to ensure a quality customer experience and appropriateoutcomes for borrowers.

Any interest-only communication strategies will continually need refining and improving to up-skill staff, bolster customer experience and outcomes and to mitigate conduct risk. This requires time, effort and resources, but plays a central role in helping to ensure customers are dealt with fairly.

HML GOOD PRACTICE - OUR SUCCESS

BENEFITS OF CUSTOMER CONTACT CAMPAIGNS:

• Earlycontactinstigatescustomeractionandprovidesthemwithmore time to consider their repayment options• Engagingwithcustomersearliercouldhelpmitigatetheriskofthem facing repossession at the end of term• Thecostofrunningacustomercontactcampaignislowcomparedtothe expense of holding the capital associated with interest-only mortgages• MeetexpectationssetoutintheFCA’sfinalisedguidance• Outsourcingcustomercontactstrategiestoathirdpartycanallow lenders to focus on the core of their business• Starttomanagethecreditriskwithinaninterest-onlyportfolio

How much time and effort do you spend managing a £200 mortgage arrears case compared to a

£200,000 interest-only mortgage?

You can discuss interest-only customer contact campaigns within the HML Interest Only Mortgages group on LinkedIn.

For more information about good practice and how HMLcan help, contact product development managerBen Chambers on 07896 683 194 or email ben.chambers@hml.co.uk

A 61 per cent customer contact rate from a letter and three outbound calls

£10 million worth of balances were converted to full or part repayment

following one letter that highlighted access to an online repayment calculator

One client HML is working with is now on its fourth successful

contact strategyCustomer feedback included: “I’m

impressed by your pro-active approach to contacting your interest-only customers,” and “I’m unsure what

to do and will speak to an adviser.”

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