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Mortgage arrears charges: A question of fairness

01 September 2009

The mortgage industry has been criticised for charging customers who fall into arrears, with the House of Commons Treasury Select Committee (TSC) leading the outcry.

It is an emotive subject, and one suspects politicians are engaging in more bank bashing to score political brownie points ahead of a general election.

In its report on mortgage arrears and access to mortgage finance published on 8 August, the TSC found it had not received conclusive evidence that lenders’ mortgage arrears charges are excessive or go beyond recouping administrative costs.

However, it said it feared some lenders are using charges as an alternative profit stream. Whilst the findings were based largely on anecdotal evidence provided by consumer champions Which? and the Citizen’s Advice Bureau, the Financial Services Authority (FSA) confirmed in the report it had some concerns. John Pain, the FSA’s managing director, retail markets, stated that when conducting its thematic review on mortgage arrears and repossessions handling, the FSA found evidence of inappropriate and excessive charges, particularly in the specialist mortgage and sub-prime lender sectors, and that part of the enforcement action against four firms related to mortgage arrears charges.

The TSC felt that the four enforcement actions being brought by the FSA represented the tip of the iceberg, even though the FSA review found mainstream lenders were largely complying with FSA requirements, and have policies and practices that should ensure customers are treated fairly. 

Nevertheless, the TSC has called on the FSA to take further action to eliminate unfair arrears charges by requiring mortgage lenders to provide an itemised breakdown of the additional costs their arrears are meant to cover.

The TSC also believes the FSA and Office of Fair Trading (OFT) should review all mortgage arrears charges made by mortgage and secured lenders to determine whether they are reasonable.

The Council of Mortgage Lenders (CML) has responded to the TSC’s allegation by stating that it is fair for customers to be charged when they fall in arrears, to cover the cost of the extra work being carried out.

The CML argues that if lenders do not charge borrowers who are in difficulty, the costs would have to be borne by all customers.

Nevertheless, lenders can expect further action to be brought by the authorities in this area. 

In response to the TSC’s report, the FSA reminded firms that it is conducting a wide-ranging review of all aspects of its mortgage regulation, and will be publishing proposals this autumn. 

In the meantime, lenders would do well to review their arrears handling procedures to ensure they fall in line with FSA good practice guidelines, which were in June 2009.

For example, when a Direct Debit request is refused, customers should be informed and given time to rectify the situation before it is re-presented, so avoiding further unpaid Direct Debit fees being incurred.

Also, where Direct Debit requests are repeatedly refused, lenders should suspend the Direct Debit to avoid further unpaid fees being incurred.

Poor practice – for example determining arrears charges and fees by benchmarking against those set by other lenders, without reference to the lender’s own costs – could lead to enforcement action being brought by the authorities.

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