HML - FCA Guidance Consultation 13/2:Dealing fairly with interest only customers who risk being unable to repay their loan

Background

The FCA has published the findings from their thematic review on the maturity of interest only mortgages, which was undertaken to understand the risk to borrowers who reach maturity and do not have sufficient capital to repay their loan. The review looked at the current policies, strategies and practices of eight lenders representing 40% of the UK interest-only residential mortgage market.

Key proposals

As a result the FCA is expecting firms to review their existing procedures to ensure the fair treatment of customers who are unable to repay their balance at the end of the term. The FCA acknowledges customers are responsible for repaying the balance at the end of the term. However, firms should take early action to minimise the risk of non-repayment through pro-active early and effective consumer engagement over the mortgage term.

Initial conclusions

The Guidance Consultation does not contain any surprises, and is in line with the best practice that has been adopted by the industry in response to this issue. It is clear that the FCA expect lenders to be proactive in dealing with the issues of borrowers with an interest only mortgage and no adequate repayment vehicle.

Prior to April 2014 the FCA also require lenders to contact all borrowers with an interest-only mortgage, which is due to mature before 2020 to establish what plans they have in place to repay their loan.

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How can HML help?

• Conduct your interest only contact strategy, including outbound calls – in line with FCA’s view of best practice (on a non advised basis)

• Capture customer responses on our i-connect repayment strategy screen – maintain an audit trail

• Provide Management Information on customer responses alongside their customer profile – LTV, term remaining, customer age, balance size, etc

• Carry out appropriate call monitoring to ensure fair and consistent consumer outcomes

• Provide support with documenting letters and call scripts

• Mitigate the regulatory risk

HML already has a customer contact business model in place and is already actively engaged with a number of its clients supporting their interest only customer contact initiatives. Our own research and analysis suggests customer contact campaigns will:

• Help instigate action from customers to take steps to repay their mortgage balance – not just paying the interest - 0.7% to 3.5% of customers convert to part or full repayment following contact campaign

• Improves your credit risk profile – For one client this equated to £26k per month additional cash collected and £10 million worth of balances will be repaid

• Achieve greater success by including outbound calls in contact strategies - 61% contact rate following letter and 3 outbound calls versus an average 5% response rate from letter only campaigns

• Customer will confirm what repayment plans they have in place - 34% of customers say they have a full repayment in place

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