Examining America’s MMR equivalent
With the Financial Conduct Authority’s MMR set to go live on 26 April, lenders will have one eye on how America has handled its own transition.
In the UK the Financial Services Authority became the Financial Conduct Authority and the Prudential Regulation Authority, both under the Bank of England.
Two new rules in the US are ‘ability-to-repay’ and ‘qualified mortgage’, outlined under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The ‘ability-to-repay’ rule states borrowers must provide financial documentation which will then be verified by lenders. As will happen under to MMR borrowers are required to have sufficient income and assets to repay the loan.
America is promoting a greater emphasis on the long-term, as promotional ‘teaser’ rates are prohibited, meaning lenders must be able to easily measure overall cost of the loan and not be starstruck by a low introductory rate.
Brian Pitt, chief executive officer of Rockstead, said: “I think we sometimes forget that ‘ability to repay’ has formed a fundamental part of credit assessment in the UK for a long time and has not just been introduced through MMR. And that principle makes sense.
“On the other hand the need to take into account a borrower’s existing credit commitments when assessing affordability makes absolute sense and is one area that we have failed to address properly in the UK to date.”
The second prominent US regulation is ‘qualified mortgage’, which gives the lender additional legal protection providing they stick to a set of rules. Not all loans offered have to be qualified.
With qualified mortgage loans lenders cannot charge upfront fees costing more than 3% of the total amount borrowed. Interest-only loans, negative-amortisation loans and terms beyond 30 years are prohibited.
The Council of Mortgage Lenders acknowledged that the QM’s legal protection will exceed the UKs.
The CML said: “In the US, there is arguably a more limited emphasis on the lifelong aspects of affordability assessment than in the UK.
“As a consequence, there also appears to be less ensuing concern with knock-on effects, such as the consequences of lending into retirement.”
Pitt said it was too early to assess the long-term affordability measures, but approved of the approach across the pond, recalling how mortgage terms over 30 years have been more common in the US and Canada for some time.
He said: “The term could be for 35 or 40 years, but the loan payment terms contained the need to re-negotiate the rate at regular intervals, say every 2 or 3 years.
“The result being that both parties had the chance to retain their mortgage lender relationship, but with a re-assessment of the interest rate regularly dependant on market conditions and customer circumstances at the time of re-negotiation. With hindsight, that looks like a good plan.”
QM mortgages come in two forms, ‘safe harbour’; with lower priced loans for consumers and “rebuttable presumption” for those with lower credit scores. The former offers higher legal protection, while the latter stands at 1.5% above the current prime rate.