Self-certification loans and mortgages have gained a bad reputation over the past few years.
Dubbed ‘liar loans’, many people blame them in part for the financial crisis, due to the sheer volume of borrowers that used them to overstate their income and take on mortgages and loans they couldn’t afford.
In 2009 the regulator stated that as part of its Mortgage Market Review all income would need to be verified from April 2014 onwards – effectively banning self-cert.
Since then, lenders in the mortgage market have taken it upon themselves to assign self-cert to the history books.
But what about the secured loan market? Self-cert in its truest form – where no income is verified – appears to no longer exist, but what has replaced it, and will the Financial Conduct Authority’s intervention into the market next year put a block on some lenders’ practices?
Barney Drake, operations director at Y3S Loans, does not believe that true-self cert still exists in the secured loan market but says there is still help for customers who may not meet lenders’ traditional criteria.
He says: “You may have for example a customer who has recently become self-employed – they may have started in April of this year and their financial year end is September or October but they could have had 20 years experience in a particular industry.”
Drake says if the borrower fits the lender’s affordability criteria and they can have confirmation of the earnings from a qualified accountant, with evidence that the business is going to do well, some lenders will take a pragmatic common sense view and lend to the borrower.
He says: “There are lenders that will allow you to work over a projection and although that is in one way linked to self-cert, you will never have self-cert as it was six or seven years ago, where a borrower would sign a piece of paper and say ‘yes, I can afford it’. A milder form of the principle is taking a more common sense and pragmatic view on the applicant’s circumstances.”
Simon Stern, director of Prestige Finance, says it requires evidence from both an accountant’s certificate and a self-employment declaration letter.
He says: “I can’t comment on everyone’s criteria, obviously some lenders are more flexible than others but with regulation increasing all of the time, affordability is very much at the centre of regulation, so proof of income is key.”
He adds: “This is an industry that is growing and is coming away from all of the stigmas that were attached to it many years ago, and it is doing a lot of good for a lot of people out there.”
However, Alan Cleary, managing director of Precise Mortgages – which has just launched into the sector – says he has concerns about the number of self-employed applicants the secured loan market seems to attract.
He says: “There is a bunch of people who took out self-cert mortgages who can’t prove their income but might still want to buy a house – they will find a way.”
In March 2012, the Financial Services Authority expressed concerns that buy-to-let mortgages may be being used fraudulently by borrowers and mortgage intermediaries to get around the stricter affordability checks in the residential market.
Cleary says: “The industry has seen people in the buy-to-let market disguising residential mortgages as buy-to-let. From our analysis, a pretty high percentage of the loans in the secured loan market are self-employed. I haven’t got any proof [of self-cert], but if you look at some of the lending policies of some of the lenders, they look pretty lenient towards the self-employed.
“I think there are people dodging the self-cert rules in the first-charge market and borrowing money in the seconds market based upon projections from their accountants.”
Cleary however adds that Precise Mortgages has just launched into the market so he may find that a high number of self-employed applicants is the genuine norm in the market.
Doing things by the book
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries and the Association of Finance Brokers, says despite the widely publicised ‘ban’ on self-cert in the mortgage market, there is nothing currently in the FCA’s rules or the Office of Fair Trading’s that bans self-cert.
As part of the MMR, which comes into effect for the first-charge market in April 2014, the FCA has said firms should provide an appropriate check of the income declared by the consumer.
But Sinclair says: “If I certified that I have a £50,000 income, there is no requirement within the current OFT rules that a lender would have to go and physically check that, in the same way that there is no rule in the mortgage market that you have to do that – that rule does not come in until April 2014.
“There is also nothing in the rules that stops firms in the seconds market accepting self-cert of income and it is lenders risk if they choose to do so.”
He says lenders will take their own view as to whether self-cert lending is part of their risk appetite given their ownership and capital structures.
Sinclair says: “Are some lenders doing true self-cert? – I don’t know. There will be lenders who take different views as to how much income needs to be evidenced and it will be their risk decision.”
In the seconds market, a lot of firms are funded differently to those in the first-charge mortgage market, for example through private investors, who will have their own risk judgement.
Sinclair says: “If I am an American comic on the circuit and my accountant knows I have advance bookings for next two years and income of X, why would a lender not accept that as an indication of future earnings? Or a director of an emerging company in the self-build market, a lender might lend against the future profitability in different terms.”
He adds: “Some people will be taking a punt on the basis – in the same way if someone said they weren’t sure of what income they had – I might lend to them at 15%, whereas if I have certainty I might lend at 8%. How far does a car dealer go in verifying my income when I’m buying a car?”
Sinclair says if there are any lenders offering loans where their client’s income is not evidenced, they will probably have to change their ways in 2015 – when the final regulatory rules from the FCA and EU Directive come into play for the secured loan market.
But he adds: “People who do projection lending will be ok, as the regulator will look at that and say, they have done a reasonable amount of work to make sure the person can afford it, not just accepted their word for it.”
Self-cert was badly abused when it was commonplace in the first and second charge markets, but when many lenders stopped offering it all together, there were still a niche group of borrowers that needed to be serviced with this type of loan.
As the financial markets have changed over the last five years, so have lenders’ attitudes and many lenders in the second charge market who might have once considered carrying out a true self-cert loan may well have had a change of heart after seeing the damage those types of loans can do.
Once the final rules on FCA regulation are introduced, if there are any secured loan lenders out there offering true self-cert or aiding those who are looking to use it as a replacement to a mortgage then it will be hard for them to do so without falling foul of the FCA guidelines; and it will be up to the FCA to stamp this out if it comes across it. When the FCA does define which set of rules the secured loan market needs to follow, one of the likely problems the market will face is that the FCA will not offer a definition of how lenders need to check an applicant’s income and what methods it will or will not tolerate.
The secured loan market is very different from the first-charge mortgage market and one of its greatest attributes is the flexibility it can offer borrowers. So whilst nobody in the market would want to see a return to the old days of self-cert, it is also important that worthy customers still have access to finance products – if they are using them in the right way.