CML to publish buy-to-let statement of practice
Published: 9 September 2014 | Author: Bernard Clarke
A consultation published last week by the Treasury on how the UK should implement the European mortgage credit directive could have significant implications for the buy-to-let sector – a section of the mortgage market that has made a major contribution to the growth of the private rented sector since it first appeared almost 20 years ago.
Lenders are disappointed that the Treasury has concluded that implementation of the credit directive – which will have to be fully integrated into UK law by March 2016 – is now likely to have a greater impact on the buy-to-let sector than originally anticipated.
In its consultation, the Treasury proposes to extend statutory regulation to a relatively small section of the buy-to-let market. The group of borrowers that would be affected are those who have not actively acquired a property in order to be a landlord and do not appear to be acting in a business capacity. They could include those who have inherited a property, or have previously lived in a home that they have been unable to sell, and which they now let.
For lenders, regulation that affects some buy-to-let landlords, but not others, is potentially problematic – as is any lack of clarity about whether individual cases should be regulated or not.
It is therefore the potential complexity of the proposals – rather than the number of borrowers affected – that causes most concern.
The Treasury acknowledges that most of those with one of the UK’s 1.6 million buy-to-let mortgages will have made an active decision to become a landlord. They have invested in property to earn an income, on which they will be taxed as a business. We agree with the Treasury’s view that it is inappropriate for these borrowers to be captured by regulation intended to protect consumers.
Our statement of practice
We recognise that both lenders and landlords taking out buy-to-let mortgages have responsibilities to ensure that the market continues to work well. To help reinforce this, we have been working on a "statement of practice” for the buy-to-let sector, the proposed scope of which we outline later in this article.
The lending industry is also currently awaiting publication of a second consultation – by the Financial Conduct Authority (FCA) – on proposals for implementing the European directive. This will detail the changes that will most affect the wider mortgage market. We hope that its impact on buy-to-let will be limited, mainly affecting proposals for the register of firms that will operate in the sector.
We hope that the FCA will publish its paper as soon as possible. In the weeks and months ahead, we look forward to working closely with the FCA and the Treasury to minimise disruption to the lending market, especially given that UK mortgage regulation has only recently undergone a complete overhaul.
The growth of buy-to-let
Chart One shows that buy-to-let lending has grown strongly since we began monitoring it in 1999. From annual advances of less than £4 billion in 2000, total buy-to-let lending peaked at more than £45 billion in 2007. It contracted sharply following the onset of the financial crisis but has since recovered strongly. Between 2009 and 2013, annual buy-to-let advances more than doubled, from just over £8.6 billion to almost £21 billion.
Chart One: Annual gross buy-to-let mortgage lending, £m
Source: CML Research
Buy-to-let lending has made a major contribution to the expansion of the private rented sector. Today, around 17% of England’s population live in privately rented accommodation, compared to around 10% in 1999. As Chart Two shows, the number of households living in privately rented homes now exceeds the social rented sector – for the first time in decades.
Chart Two: Growth in the private rented sector since the 1990's, % of households in England
Across the UK, buy-to-let properties account for around one-third of the 4.7 million households living in privately rented accommodation. Over the last 15 years, buy-to-let is generally held to have widened choice for tenants and improved standards in the private rented sector.
The Treasury’s proposals
The lending industry is disappointed by last week’s consultation because the Treasury had appeared to believe that the UK could achieve the changes needed as a result of the European directive by implementing voluntary mechanisms.
However, the Treasury now believes that it would be unlawful to exempt all buy-to-let lending from the UK’s statutory regulatory framework, even if we introduce our voluntary statement of practice. In order to comply with the European measures, it believes it has no choice but to impose national law. There will, however, be no retrospective rules, so new regulation will apply to qualifying loans taken out after March 2016.
The Treasury’s view does not imply, however, that there is any need for additional consumer protection in the buy-to-let market. It is not driven by any evidence of consumer detriment. It is simply a technical interpretation of what the government believes is required legally to comply with the European directive.
The government has yet to undertake any detailed assessment of how many loans would be captured by its proposed rules, and its consultation paper says that it would welcome views on this.
Another key issue revolves around deciding which individual loans should be covered by the proposed new rules. In many cases, the Treasury believes that lenders will be able to establish this through their underwriting processes. It also proposes that firms will be able to rely on a declaration by the borrower, as long as there are no reasonable grounds to suspect that this is incorrect. But is that a declaration that all consumers will be willing to make? And will they remember making it – and recall its implications – several years later?
What’s in the statement of practice?
In recognition of our view that there are responsibilities for lenders and borrower landlords, and to reinforce current good practice, we have been working closely with members on our statement of practice for buy-to-let lending. We hope to finalise and publish this in the coming weeks.
The statement aims to set out over-arching principles for the sector, and the final document is likely to have sections on:
- The responsibilities of lenders, with a commitment to lend responsibly and treat customers fairly – echoing the broad principles of fair treatment that underpin the statutory regime of mortgage regulation protecting consumers.
- An undertaking to provide information that is fair, clear and not misleading, and in a form broadly consistent with the existing “key facts illustration” and the proposed European standardised information sheet. There should also be clear statements on fees and charges, monthly repayments and an overall cost calculation.
- The need to make a robust assessment of mortgage affordability, allowing for conditions in the rental market, the impact of future rate rises, rental voids and arrears, and other costs. There should also be a commitment to take extra care if the borrower has an impaired credit history and to consider whether it is appropriate to lend in those circumstances.
- The responsibilities of buy-to-let landlords, underlining their obligations to be competent and capable, and to accept that their borrowing is a commercial decision.
- Specific responsibilities of landlords to comply with legal requirements for letting property, treat their tenants fairly, maintain and insure the property adequately, and accept the commitments associated with taking out a mortgage.
Members will have to state annually that they agree to comply with the statement of practice. They will also need to have to agree to operate in accordance with a written complaints-handling policy, approved by a senior management committee.
Lenders are disappointed that the issue of regulation of the buy-to-let sector turns out not to have been adequately resolved. This means that firms must now embark on another round of reform, having only just completed the exhaustive implementation of a comprehensive set of new rules as a result of the mortgage market review.
The Treasury does not see any need for additional consumer protection, and is putting forward proposals purely to comply with European legal requirements. We hope that the overall impact of the directive will be modest, as much of it was anticipated and built into the most recent set of rule changes. We will also work to try to ensure that any changes still required cause minimal disruption and uncertainty in the buy-to-let sector.