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Debate begins on international underwriting standards


Published: 1 November 2011 | Author: Bernard Clarke

UK lenders support the right kind of regulatory reform to reinforce financial stability, and we will now work with the Treasury and the Financial Services Authority (FSA) on how the UK should respond to new proposals from the Financial Stability Board (FSB) on the development of international mortgage underwriting standards. But a key concern for lenders is the potential for conflict in reforms now being developed at a global, European and national level. 

What is particularly welcome about the FSB’s latest document – the second draft of proposals for international mortgage underwriting standards – is the acknowledgement that it is seeking to develop principles that will cover national markets that are themselves vastly different. The FSB is seeking to develop proposals for markets ranging from mature and well-established ones like the UK to countries in which mortgage lending has emerged on a significant scale only relatively recently and is now a rapidly evolving phenomenon.

Helpfully, therefore, the FSB accepts that, while it is seeking to reinforce international standards, what it proposes may not be appropriate for every individual national market. 

The approach to the FSB’s proposals that appears to be evolving in the UK is that they should be viewed as a “comply or explain” regime – reinforcing broad principles on underwriting standards, but accepting that the dangers it is seeking to address may not arise in all national markets or may be covered by other regulatory initiatives. It therefore appears ready to accept good arguments why it may not be appropriate to apply all its proposals in every country.

The FSB wants its proposals to cover all lending secured on residential property, including buy-to-let. They are encapsulated in seven broad principles, five relating to underwriting practices and two covering the supervision and regulation of firms:

  • On the use of restrictions on lending relative to the value of the property or the income of the borrower, the FSB accepts that inflexible limits should not be widely applied, an approach which we welcome. Instead, the FSB argues for regulation that allows for differences in the riskiness of different types of products and market conditions. Helpfully, the FSB’s approach reflects the views of the Bank of England’s Financial Policy Committee.
  • On income verification, the FSB helpfully acknowledges that there should be responsibilities not only for firms, but also for consumers in providing full and truthful information. For UK lenders, however, there are likely to be concerns over proposals to verify a borrower’s income historically, which go further than measures currently being developed both in this country and in Europe.
  • On assessing the ability of borrowers to continue to meet their mortgage commitments, the FSB’s proposals broadly reflect the approach being taken by the FSA in the UK. Lenders may, however, be concerned by proposals to assess a borrower’s ability to save, his or her potential future – as well as existing – credit commitments, and the capacity to rely on payment from other sources than income, including savings, insurance and entitlement to government support.
  • On property valuation, the FSB reflects the UK’s approach, with positive references to standards already upheld by the Royal Institution of Chartered Surveyors. But proposals to proscribe the outsourcing of anything to do with underwriting processes are likely to concern both lenders and intermediaries in the UK.
  • On mortgage insurance, we agree with the FSB’s view that it should not be used as a cover for poor underwriting. The FSB also says that mortgage insurers should be covered by the same underwriting requirements as lenders.
  • On supervision of the mortgage market, the FSB focuses on authorities having access to the right kind of data to have a clear view of the build-up of risk. We agree.
  • Finally, the FSB says supervisory authorities should “disclose an assessment of mortgage underwriting practices.” We believe this would be helpful, although it is not clear whether the assessment is intended only for the FSB, or should be publicly available.

The FSB is consulting on its proposals, with responses due by 9 December. We are therefore consulting with members to determine their views, and hope to contribute to – and support – a joint response from the UK, on behalf of the Treasury, FSA and lenders.