The Financial Conduct Authority (FCA) has outlined proposals to ensure that firms provide tailored support to mortgage borrowers who continue to face payment difficulties due to coronavirus.
During the initial phase of the pandemic, payment holidays provided mortgage borrowers with immediate and temporary support. They have helped millions of consumers through the immediate impacts of the current emergency and helped firms provide support at unprecedented scale.
The majority of customers who have had a payment holiday are expected to resume full repayment. However, many will remain in financial difficulty.
The additional draft guidance for firms is to ensure that consumers – both those who have benefitted from payment deferrals under the current guidance who continue to face financial difficulties, as well as those whose financial situation may be newly affected by coronavirus after the current guidance ends – get the support they need in these extraordinary times. Some consumers will continue to be impacted by coronavirus while others will be newly impacted in the coming months. Consumers in these situations will benefit from firms providing them with the tailored support that is normally expected, which also needs to reflect the uncertainties and challenges that many customers will face in the coming months.
The current guidance will continue to provide support for those impacted by coronavirus until 31 October 2020 – with consumers able to take a first or second three-month payment deferral. The FCA expects the current guidance to expire on 31 October, but will keep this under review depending on how the wider situation develops.
The draft guidance proposes that firms should consider the appropriateness, and use, of a range of different short and long-term support options to reflect the specific circumstances of their customers. This could include extending the repayment term or restructuring of the mortgage. Where consumers need further short-term support, firms should offer arrangements for no or reduced payments for a specified period to give customers time to get back on track.
Christopher Woolard, Interim Chief Executive at the FCA, said “It is important that consumers who can afford to resume mortgage payments should do so. However, we understand that borrowers facing payment difficulties because of the pandemic will continue to face uncertainty and may also experience temporary interruptions in income. We are proposing that firms contact their borrowers in good time before the end of a payment holiday, and work with them to come up with a tailored plan to help get them back on track. Firms should not take a ‘one size fits all’ approach.”
Under the proposed guidance, firms should prioritise giving tailored support to borrowers who are at most risk of harm, or who face the greatest financial difficulties.
Firms should also provide borrowers with the support they need in managing their finances, including through self-help and money guidance, and refer borrowers to debt advice if this meets their needs and circumstances.
Where borrowers require further support from lenders, either at the end of payment holidays under our guidance, or where they are in need of support for the first time, this would be reflected on credit files in accordance with normal reporting processes. This will help to ensure that lenders have an accurate picture of consumers’ financial circumstances and reduce the risk of unaffordable lending. Firms should be clear about the credit file implications of any forms of support offered to borrowers.
Borrowers who took a payment deferral as a result of the pandemic through the government-sanctioned “mortgage holiday” arrangement should not be prevented from switching to a cheaper deal under the FCA’s modified affordability assessment, which was brought in to help mortgage prisoners.
The FCA has also set out how and when it wishes lenders to report payment difficulties to credit reference agencies.
It says that at the end of any payment deferral periods that were granted as a result of its June guidance, any plan to repay the shortfall that is agreed with the borrower should not be reported to credit agencies, so long as borrowers stick to the arrangement.
However, any forbearance measures agreed once this window has closed may be recorded on borrowers’ credit files.
The current guidance for those impacted by coronavirus will apply until October 31 – with borrowers able to take a first or second three-month payment deferral.
Commenting on the announcement, StepChange Debt Charity Director of External Affairs Richard Lane said “We’re pleased to see the FCA telling firms that they should not rush to possession action for people whose mortgage problems have arisen due to Covid, and that firms should not take a “one size fits all” approach. It’s vital that there is ongoing recognition of the fact that, for many people, the financial aftershocks from Covid will take a while to subside, even for those whose finances will be sustainable in the long run.”
“We’re also pleased to see the clarity with which the FCA sets out its expectation that people’s credit records should not be affected by having taken payment holidays if they resume their contractual payments and agree a mechanism for clearing arrears with their lender. However, we think there is still the risk of unintended consequences out of CRA reporting, both on mortgages and more generally. We would like to see more reassurance that the mechanisms agreed by lenders will be truly affordable, taking account of people’s wider financial commitments. It’s clear that the regulator still anticipates an impact on many people’s credit records. It’s important that this doesn’t result in counterproductive behaviour, with people potentially trying to protect their credit status at the expense of truly affordable payment plans – for a great many people, ongoing forbearance and a reduced payment plan will be the only right and sustainable option, despite the credit status impact.”
Jane Tully, Director of External Affairs at the Money Advice Trust, said “Today’s FCA guidance on mortgages recognises that the longer-term financial consequences of Covid-19 are likely to see many mortgage holders struggle to make ends meet far beyond the 31st October.”
“The FCA is right to emphasise the need for specific protections for these households, including preventing firms from repossessing in cases where mortgage arrears were incurred solely a result of coronavirus payment deferral. However, this guidance may not be enough to prevent serious mortgage difficulty for many.”
“The regulator could go further by requiring lenders to continue offering specific protections to customers impacted by the outbreak – including requiring firms to offer further targeted payment deferrals as ‘forbearance of last resort’ in some circumstances. Ultimately, however, under our current system there is a limit to what the FCA and lenders can do, on their own, to prevent repossessions.”
“The Government needs to step up by closing the gaps in the mortgage safety net by reforming the Support for Mortgage Interest scheme – including reducing the 39 week wait for payments to13 weeks, and increasing the £200,000 mortgage cap that was set 11 years ago and has not been updated since.”
Eric Leenders, Managing Director of Personal Finance at UK Finance, said “The industry has provided unprecedented support to customers as part of its clear plan to get Britain through the coronavirus crisis. As we begin to arrive at a ‘new normal’, a more tailored approach to customer support using a range of measures will likely be more suitable for those customers who continue to experience financial difficulties or find themselves newly affected by the ongoing crisis. It is important for customers who are able to resume their mortgage payments do so, however lenders are fully prepared to support any customers who face difficulty and it is vital that those who are facing payment difficulties get in touch with their provider as soon as possible.”