Lenders accused of luring vulnerable into debt
Sub-prime lenders have been accused of luring vulnerable borrowers into debt by offering unaffordable mortgages and secured loans.
A report by Citizens Advice Bureau, entitled ‘Set up to fail’, claims dubious advice from brokers, irresponsible lending decisions and aggressive arrears management by sub-prime lenders is pushing up incidences of arrears and repossession.
Worst, the report warns many home owners are being left in serious debt and even homeless after being sold loans that they simply can’t afford to repay.
Lenders repossessed 22,700 properties in 2006, according to data from the Council of Mortgage Lenders, a figure set to rise to total 30,000 in 2007 and 45,000 in 2008.
Citizens Advice says it has seen an 11% increase in mortgage and secured loan problems. Of these, more than a third had below average household incomes with one in five was reliant on means tested benefits.
Nearly 70% had outstanding unsecured debt averaging £22,000.
The charities’ analysis of repossession cases from 23 country counts in January 2007 also found that sub-prime lenders were responsible for significantly more possession orders than their mainstream equivalents.
David Harker, chief executive of Citizens Advice, says: “Homeowners have been mis-sold unsuitable and costly home loans that are doomed to fail from the start.”
But the lending industry has slammed the report as “simplistic” and “sensationalist”. The CML, which represents 98% of UK residential lenders, insists the overwhelming majority of mortgage borrowers meet their payments on time and in full.
Michael Coogan, director general of the CML, says: “Sub-prime mortgages give people a way to rehabilitate their finances and are important in a financially inclusive mortgage market.”
The Citizens Advice report comes amid the aftermath of poor sub-prime lending decisions in the US market. And in the summer, the Financial Services Authority warned that sub-prime lenders were not covering all aspects of responsible lending requirements.
But the CML says the majority of problems lie with secured or second charge loan providers, which unlike mortgages are not regulated by the FSA.
Coogan says: “There is a case for FSA regulation, that at present only covers first mortgages, to apply to other secured loans.”
All sub-prime financial products are aimed at borrowers with patchy credit histories and the term typically refers to mortgage candidates, though any form of credit offered to people who have had problems with debt repayment is classed as sub-prime. Depending on the lender’s own criteria, sub-prime can apply to borrowers who have missed a few credit card or loan repayments to people who have major debt problems and county court judgments (CCJ) against their name. To reflect the extra risk in lending to people who have struggled in the past, rates on sub-prime deals are typically higher than for “prime” borrowers.
As the name suggests, secured loans require security, or “collateral”, usually in the form of property, a motor vehicle, or another valuable item, as a guarantee for the loan. This effectively reduces the level of risk to which a lender is exposed, as the lender has a claim against your home, or other effects, if you default. Secured loans are often available at competitive interest rates. Types of secured loans include mortgages, logbook loans and some types of hire purchase where the loan is secured on the goods you’re buying and these are repossessed if you default.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.