2nd Mortgage Requirements2. mortgage requirements
CEO Newsletter - Secondary Creditors and Corporate Credit Responsibility
The Financial Conduct Authority (FCA) issued a Brief "Dear CEO" on Second Charges on 2 March 2018. Specifically, the Brief asks CEOs of companies that conclude second-charge mortgage agreements to examine their company's mortgage credit process. EZV wants to confirm that companies are responsible in granting loans and that their procedures, system and control are in place to make sure that this is the case by 1 May 2018.
When the Mortgage Credit Directive (MCD) was implemented in March 2016, the second mortgage ordinance was transferred from the FCA system of granting loans to consumers to the mortgage system. EZV carried out a screening of how companies had adjusted to the good practices on loans set out in Chapters 11 and Clause XIA of the Mortgage and Home Loan Regulation:
Business Code of Business and, if applicable, how companies comply with the Senior Management and Arrangements, System and Control (SYSC) of the FCA-Manual. EZV examined a number of corporate credit granting procedures as well as the areas of corporate system and control that could compromise its capacity for responsible credit.
EZV examined the credit policies documentation and the credit file data in order to evaluate whether the companies were able to demonstrate that their loans complied with prudential requirements. It was also necessary to establish whether the reasons for the companies' credit decisions were sufficiently clear and substantiated. Companies were also screened for their affordable pricing and whether the revenue and expense analyses were sound.
The FCA also examined the precautions taken by companies to prevent them from being used as a means of committing criminal finance. EZV has expressed a number of reservations and asked Chief Executive Officers to reconsider their guidelines, processes and practice in this area. It was found that all companies in the EAO Sample had tried to adjust their already established practice by attaching an affordable price calculator to assure respect of the MCOB.
There have been, however, instances of practice where some companies have not made their loan choices on the basis of estimates of incomes and expenditures. It is clear to the FCA that it is not enough to rely exclusively on capital adequacy, debt-equity ratio or yield multipliers for granting loans. It was also found that incomes and expenses sometimes provided available earnings numbers which did not appear reasonable when looking at an applicant's loan portfolio.
In general, the FCA saw good practice with regard to assessing incomes for clients in work. Concerning the evaluation of incomes of the self-employed, however, they found that the evaluation of incomes was poorly treated. The FCA was in some cases not able to determine where an employee had received net profit for the year.
Auditor certifications were acceptable even if the numbers were not reasonable and the creditors had not objected in such cases. The majority of companies use some kind of statistic modeling to estimate fundamental expenses and cost of life. Companies must be able to demonstrate that the information they use is appropriate to provide a reasonable picture of the customer's spending per month.
EZV found that companies do not always use reasonable hypotheses, a practise that became particularly clear when clients consolidated close or marginal accounts of bank cards and bank drafts. A number of companies used Office for National Statistics (ONS) statistics. It was sometimes not clear, however, when the numbers used were last refreshed or checked.
It was also found that there was a shortage of methods of questioning numbers when the numbers were clearly not reasonable. A number of companies' QA and supervisory agreements were found not to be fully adequate to identify prohibitive credit and associated risk. In addition, the audit revealed that some supervisory agreements were operational and did not focus on client results.
Verification revealed that companies that accept the document without challenges could potentially be tampered with by the customer. In particular, the audit focused on the risks of frauds. EZV asked the companies to take into account the results of their 2016 Corporate Credit Governance Audit (TR16/4) when carrying out their audits. Companies have until May 1, 2018 time to MMFlexibleFirms@fca.org. uk in writing to confirm that they have finalized their annual verification.
FCA requests companies to verify whether the assessment of affordable prices is central to any loan application and that the assessment itself adequately reflects the applicant's own financial history. Companies should make sure that processes, frameworks and control are designed to make sure that your company is responsible for granting loans.
When using model calculations or statistics, enterprises should consider whether the key spending hypotheses and the key cost of quality of life contain enough detail to provide lasting, dependable results. Companies should examine whether supervisory regimes are sufficiently focused on securing good client results. Companies should take a look at existing precautions to prevent becoming a victim of criminal finance.
Finally, undertakings should make sure that they can demonstrate that the audit carried out is focused on the areas of priority of the regulators and that it complies with the strict requirements of regulation that need to be demonstrated.