Mortgage brokers fail on record keeping

A number of small mortgage brokers are failing to keep proper records on the sale of home loans to self-employed people, the City watchdog said today.

The Financial Services Authority found that in nearly half of the 249 cases of self-certification mortgage sales it reviewed, firms had failed to keep records showing they had assessed that the loan was affordable.

In a further 36% of cases they had also not recorded why a self-certification mortgage was recommended rather than a conventional one, or from their records the reason was unclear.

But the regulator found no evidence of systematic fraud with people inflating their incomes in order to obtain a larger mortgage or being encouraged to do so by brokers.

As a result of the review, which included a mystery shopping exercise at 41 small intermediaries, the FSA said it was following up three cases where firms were prepared to discuss with clients how they could inflate their salary in order to borrow more.

"The findings on sales and advice from brokers show significant weaknesses which are disappointing," said Clive Briault, FSA managing director of retail markets.

"Further work needs to be done not only on affordability and suitability checks but also on the record keeping of the advice given.

"But it is encouraging that we have found no evidence to suggest that salary inflation is widespread or systematic within the broker industry."

The FSA also welcomed improvements made by lenders themselves in the way they sold self-certification mortgages since it issued its good practice guide in February last year.

It found that most lenders had strengthened their systems and controls, leading to more fraudulent applications being detected.

They had also improved the quality of the information they gave to their underwriting departments, and improved training for staff selling self-certification mortgages.

"We welcome the improvements made by lenders in the area of self-certification," said Mr Briault.

"But in the light of competitive pressures, tighter margins and rising arrears levels, we expect lenders to remain vigilant and to ensure that their systems and controls are regularly reviewed."

Michael Coogan, director general of the Council of Mortgage Lenders, said: "The FSA has recognised the lending industry's commitment to ensuring that self-certified mortgages are sold in a responsible way to those for whom they are appropriate.

"This is good news, as self-certification is a big help to many people who do not fit traditional lending criteria.

"But we need to work with brokers to ensure that good practice becomes ever more widespread, and to minimise the potential for misuse of self-certification."