Lenders accused of luring vulnerable into debt

13 December 2007

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.”

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