Compliance Update: Need some time to qualify for the exit mortgage? – Watch out for the impact of MMR

By Ray Cohen, AOBP Executive Committee Member and Compliance Expert at Jackson Cohen.

Needless to say, any intermediary or packager caught twisting the facts to make a case fit or not taking enough care to check the borrower’s story is likely to end up in serious trouble. The FCA is likely to consider pursuing them for mortgage fraud, facilitating mortgage fraud or failing to prevent mortgage fraud.

When people talk about credit repair mortgages they usually refer to people with a history of credit problems. They don’t generally think about people who may have only a minor blemish such as a bounced debit in the last 6 months or a missed payment in the last 12 months that stops them qualifying for the best deals currently available.

When we talk MMR, however, these very issues become of great importance.

Intermediaries are going to have to make sure they understand what is caught by the FCA’s view on Credit Repair and advise appropriately.

Intermediaries and packagers will need to make sure that their documentation is spot on, clearly identifying why the bridging loan was essential in the first place and that they have made reasonable checks on the borrower’s story. The FCA will also expect that the firm’s policies and procedures cover how these issues are dealt with and that there are appropriate systems and controls in place including appropriate monitoring.

There is a simple way of looking at what will be caught. Any loan where the borrower wants time to let credit or payment issues fall by the wayside to qualify for the planned exit will be considered as under credit repair.

Under MMR, the FCA has banned bridging loans for credit repair unless there is a guaranteed offer of exit from 26th April 2014.

So what scenarios do not come under the rules? Here are a few examples:

  • A borrower who has not yet got his full 2 years audited accounts but is on track to get them (at the required level of course). This is because the borrower hasn’t had a credit/payment issue.
  • A borrower who needs bridging finance for speed purposes, has impaired credit (however bad) and plans to exit via an impaired credit mortgage that he currently qualifies for. This is because the loan is not intended to repair credit/payment issues in order to achieve an exit.
  • A borrower with impaired credit who needs bridging finance in order to bring the property up to habitable/mortgageable standards prior to exit via refinance and currently qualifies for the planned exit refinance. As before, the borrower does not need to change his credit profile in order to qualify for the exit.
  •  A borrower who is repaying debts/avoiding bankruptcy etc. and who is planning to sell the property in order to exit. This is because the purpose of the loan is not to repair the credit profile in order to achieve an exit (and is therefore not speculative) even if in taking this action the credit profile is improved/repaired.

As no doubt you will have already spotted, some loans that would appear to be OK may also clean the credit at the same time allowing the borrower to exit with a much better deal.

The FCA has made it clear that they do not accept that a borrower can take out a bridging loan in order to qualify for a better mortgage than one (or several) that he would currently qualify for due to credit/payment issues. Indications are they will look at this area very closely and come down very hard on anyone breaking or bending the rules.

Does this pose a dilemma?

Take the scenario above where a borrower needs the bridging loan for speed purposes and plans to exit via an impaired credit loan. The borrower may then need to own the property or have the loan for a period of time before he can refinance. What do you do if the borrower would then qualify for the best prime deal on the market or one that is better than the one you provided the AIP for when demonstrating the planned exit?

If you advise them to take out the best available deal at the time of exit (and why wouldn’t you?) you run the risk of the FCA challenging you as to whether the loan was really for credit repair in the first place – was it really that urgent a deal? Could you prove that he couldn’t get the loan quick enough?

If, on the other hand, you recommend the original planned exit (clearly not in the consumers best interest) then the FCA can’t accuse you of selling the loan for credit repair purposes but the borrower could complain about the advice you have given.

If you haven’t given much thought to this issue yet you need to ensure you are ready by 26th April. If you have, it will be worthwhile having another sense check to make sure your policies and procedures are as robust as possible.

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