Fincorp, which offers second charge loans, said it believes that April’s switchover of supervision powers from the Office of Fair Trading to the FCA is only the beginning of a much tighter regime for second charges.
Although the FCA has yet to release full details of its plans for the second charge industry, Fincorp said that regulation of the second charge market will eventually fall into the same bracket as first charge Mortgage Conduct of Business and could be subject to the Mortgage Market Review rules.
Responsibility for regulating second charge mortgages transferred to the FCA alongside the wider transfer of consumer credit regulation on 1 April 2014.
While practically speaking not much is expected to change for brokers and lenders on this date, by April 2016 the FCA has said it hopes that all second charge firms will be fully authorised under a new regime.
This will lead to extra FCA fees and more compliance for those wishing to conduct second charge business in the future.
Nigel Alexander, director of Fincorp, said: “It may take the FCA a while to move the whole market from a Consumer Credit frame of working to a fully regulated one, especially since we haven’t yet seen its final decisions on how second charges will be dealt with from April, but I suspect over the next 18 months to two years secured loans will come to be treated exactly the same at first charges.”
Alexander believes that this move would “make perfect sense” given the risks posed to consumers who take second charge loans.
“In my opinion second charge loans should be regulated exactly the same way that first charges are,” said Alexander.
“It doesn’t seem right that borrowers have to go through very rigorous affordability checks and show their repayment method to get a 50% loan to value deal on a first charge but then have far fewer checks in place on the second charge loan.”
And he added: “In some cases second charges can take the debt to value ratio on a property up to 90% between the two loans but only part of the loan falls under the affordability rules in the Mortgage Market Review – it’s the same borrower and the same house. It just doesn’t seem right that this should be the case.”
Traditionally, second charge loans can be used by those who may have difficulty obtaining credit by other means and as such have often been sold to borrowers as a way to consolidate their debts.
But defaulting on a second charge loan can lead to possession of the borrower’s property which means the product is considered to be high risk under the OFT’s approach to regulation and which Fincorp thinks will be a red flag for the FCA after April.
Alexander added: “I should think the FCA will be particularly interested in making sure lenders and brokers offering second charge loans are just as careful and rigorous about who they lend to as mainstream mortgage lenders are.
“Particularly as borrowers who overstretch themselves run the risk of losing the roof over their head. I’d guess that this will come in the format of the same affordability checks as first charge lenders have to use in MMR.”
The latest statistics from the Finance and Leasing Association show that last year saw a strong performance in the second charge mortgage market with gross lending rising 37% to £445m.
Figures from the OFT show at their peak in 2006, new advances in the second charge market were estimated at approximately £7bn. In 2008 they were closer to £3bn with average loan sizes around the £20,000 mark.