Mortgage mis-selling

Why is there so much concern about the mortgage industry?

A mortgage is the largest single purchase most of us ever make, yet the mortgage industry has had no single regulator and the complex range of packages on offer - from variable to fixed-rate, via endowment and repayment mortgages - means that many homeowners have bought home loans that are entirely unsuitable for their financial needs.

Complaints to the banking ombudsman about mortgages leapt by 46% last year, with disputes including grievances about early redemption penalties, allegedly poor advice, unacceptable tie-ins of insurance products and customers being penalised with unfair terms and hidden charges.

What have the main problems been?

The alleged large-scale mis-selling of endowment mortgages has been a major cause for concern in an industry which made ?11bn profit last year. These are investment funds which are intended to mature at the end of the mortgage period, providing sufficient funds to cover the cost of the mortgage. Many homeowners have found that their endowment will not be enough to cover the mortgage and up to half a million homeowners will have to pay thousands of pounds extra to make up the difference.

What else?

Lenders have been tackled over punitive arrears charges, giving unclear product information and selling the unpopular mortgage indemnity guarantee insurance, which reimburses the lender if the borrower fails to meet repayments and it makes a loss, but does not benefit the homeowner.

Mortgage advisers have also been accused of giving biased and inaccurate advice to home loan customers. The treasury's website lists the "top 10 scams" by unscrupulous mortgage lenders, including hidden charges and small print that catches the homeowner out.

So what happens now?

Melanie Johnson, economic secretary to the treasury, has announced a new package of measures to protect borrowers from unfair or restrictive lending practices. Listen to her interview on the Today programme.

The plans for a shake-up in the regulatory system include tightening the rules governing the mortgage market and bringing the industry under the regulation of the UK's main financial watchdog, the Financial Services Authority (FSA), headed by chairman Howard Davies.

What will this mean for the mortgage industry?

The FSA will authorise all mortgage lenders, regulate mortgage advertising and require lenders to disclose all the main features of loans clearly and openly. Until now, complaints about mortgages were dealt with by the banking and building society ombudsmen.

The authority will have powers to fine lenders who mis-sell mortgages, force them to pay compensation to homeowners and even to ban them from selling mortgages. It will be illegal to sell mortgages without the approval of the FSA. The watchdog will have a statutory duty to improve public understanding of all financial products, by for instance providing information tables to help consumers to compare products.

What about direct help for consumers looking to buy a mortgage?

There will also be new voluntary CAT - or charges, access and terms - standards for the mortgage industry: a benchmark for basic standards of simple home loans, showing which products meet the minimum standards, including clear terms and conditions.

Among the other chief requirements are that variable rate mortgages must track the bank base rate and have no penalties for paying off the loan early; for fixed and capped-rate mortgages, early redemption penalties must not extend beyond the end of the offer period; interest must be calculated daily rather than annually; and there must be no obligation on the borrower to buy any other "tied-in" product.

Do the new regulations cover the entire home loan industry?

No they don't, and consumer groups, such as Which?, fear the regulations will not go far enough. They are unhappy that Britain's 43,000 mortgage advisers will not be regulated. Many consumers are unaware that while some mortgage advisers offer independent advice, others are employed to sell the investment products of only one company.

Also excluded are home loans below ?25,000, which will remain covered by the existing consumer credit act, whether they are for a second mortgage or a personal loan secured on a property.

When will the new regulations come into force?

Not until the summer of 2001, to allow time for lenders to put their house in order as it were - although the voluntary CAT standards will come into force with almost immediate effect.

How has the mortgage industry reacted?

After a lengthy consultation process, major lenders are expected to welcome most of the changes, but the Council of Mortgage Lenders, the industry's trade association, has called for all mortgages to be regulated, arguing that the exclusion of loans below ?25,000 is an "expensive anomaly".

The FSA's own consumer panel fears the regulations will not go far enough to protect consumers. There is also a danger that the proposed minimum standards could be misinterpreted by the public as amounting to a "government guarantee" of good value or suitability. Mortgage buyers are still advised to shop around, take professional advice and find a mortgage suitable to their financial needs.

Useful links

Treasury

Financial Services Authority

Council of Mortgage Lenders

CATs

Which?