MMR 2012: Self-employed is lender call

Sarah Davidson

October 25, 2012

The rule states that evidence, whether document-based or via automated systems, must be adequate to support each element of income that the firm is taking into account and be subject to anti-fraud controls.

And in order to comply with MCOB 11.6.8R proof of income will vary depending on factors such as employment status and nature and length of employment – but the regulator is not prescriptive over exactly which documents should be requested.

By way of a suggestion, the FSA had stated “for a self-employed customer a firm may wish to consider using projections of future income where these form part of a credible business plan”.

As a warning to lenders to remind them of the pitfalls to be avoided it added: “A firm must not accept self-certification of income by the customer and the source of the evidence must be independent of the customer.”

This harks back to a time when income verification often came in the format of receipts the self-employed borrower had produced on a home computer.

Research carried out by the FSA during the course of MMR has shown that overall the mortgage accounts of self-employed borrowers performed worse than those of employed borrowers.

And where a mortgage had been self-certified, one in 10 borrowers had been possessed or had a possession order made against them.

The final ruling will be welcomed by respondents to the previous draft, CP11/31, who noted the need for lenders to show a flexible approach to customers with ‘non-standard’ income, such as self-employed customers or contractors.

However many were worried that uncertainty about the future supervisory approach of the FSA might result in lenders adopting an overly cautious approach to such cases.

Sign up to our daily email