Implications of EU Mortgage Credit Directive (MCD)
The following note will be of interest to members with a back book of second-charge loans and/or who wish to offer shared-equity second-charge loans in the future.
As explained in previous Member Updates, from 21st March 2016 implementation of the MCD in the UK will require second-charge mortgages to be fully FCA regulated. This will include administration of house builders’ back books of second-charge loans from shared-equity sales, as well as any new shared-equity second-charge lending post March 2016.
This means either house builders will have to become fully regulated, or they will have to use a regulated third party to administer their back book and originate any new loans. It seems unlikely many house builders will become regulated.
Two of the FCA’s four regulatory categories are relevant to home builders:
‘Entering into a regulated mortgage contract as lender’ (i.e. new mortgage origination)
‘Administering a regulated mortgage contract’ (i.e. relevant to back books)
Shared equity has traditionally been used in market downturns. However it is clear from talking to members that shared equity is being used today, despite Help to Buy Equity Loan, in Scotland and as part of S106 Affordable Housing requirements. Therefore we need to sort out both back-book administration and new lending.
2. Regulated third-parties
We understand from the Financial Conduct Authority (FCA) there are perhaps 15 or so organisations that could undertake regulated administration of back books. HBF has held discussions with five organisations. We cannot in any way recommend any of these five. They were brought to our attention by various means (an HBF member, introduced by an HBF member, met at the CML conference, approached HBF). Any HBF member seeking to appoint a regulated third party must undertake its own due diligence.
They were also asked to explain which of the two categories (origination of new loans, administration of back book) they are regulated for (or seeking registration). I attach a note summarising the replies of the five organisations. Please click here, to view the note.
3. FCA information for house builders
The FCA is finalising a Factsheet for house builders which I understand will be issued quite soon. I commented on an earlier draft. There will also be a Webcast made available for house builders in due course (with yours truly playing a staring role).
4. Outstanding issues
I had hoped to have everything tied up by the time I issued this Update. Unfortunately this has not been possible. However I felt an Update would be helpful, even allowing for incomplete information, as the March 2016 deadline is getting ever closer. Because the situation is evolving, there is never a perfect time to issue a note to members.
There are several outstanding issues:
Administration of regulated and unregulated loans
Based on guidance given to me by Treasury, I have previously indicated that unregulated second-charge loans (i.e. those with 4 or fewer ‘payments’) will not have to be administered by a regulated body, although of course house builders may for administrative convenience and cost efficiency decide to have their regulated and unregulated loans all administered together. However a lawyer acting for one of the house builders has indicated to me that he thinks this advice is not correct. I am seeking urgent clarification from Treasury and the FCA and will advise members once I have an answer.
Origination of new second-charge loans
It is not altogether clear to me the circumstances in which a house builder could appoint a regulated third party to originate new second-charge mortgages on its behalf. It appears the third party would have to be actively lending (whether first or second-charge loans). The FCA had previously indicated that the industry might wish to consider appointing an existing lender (e.g. a building society) to undertake second-charge lending on behalf of house builders. I had understood this to be an alternative to appointing an organisation such as the third parties we have met. However I am now not sure. I am urgently trying to clarify this issue with the FCA and will send out a further Update to members.
Credible Repayment Strategy (CRS)
As explained in previous Member Updates, the need for borrowers to have a CRS in the case of interest-only loans, and the difficulty the mainstream lenders have had in defining a CRS that they believe would be acceptable to the FSA, has led to a very severe contraction in the availability of interest-only mortgages. Second-charge loans for shared equity are very similar to interest-only mortgages, and a CRS will be required for new borrowers. We are still trying to clarify whether there is a CRS that is acceptable to the FCA and workable for house builders (or those acting on their behalf). I will do a further Member Update when we have further information on this issue.
If you have any questions arising from my Update, or need any further information, please do not hesitate to contact me.
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