DBRS Comments on Concerns for UK Mortgage Consumers Highlighted in Latest FCA Thematic Review

DBRS Ratings Limited (DBRS) notes that, on 6 December 2018, the UK Financial Conduct Authority (FCA) published its findings following a thematic review of mortgage lenders and the management of long-term mortgage arrears and forbearance.

The review establishes that most mortgage lenders appropriately manage customers with long-term mortgage arrears and provide forbearance to affected customers in long-term financial difficulty. Firms generally agree to appropriate arrangements for mortgage borrowers to repay arrears, while lenders also sensitively tailor approaches to customers’ individual circumstances.

Furthermore, the FCA noted that some firms have a single point of contact for borrowers in terms of dedicated call handlers to provide a consistent customer experience, while a small number of firms focus on the broader end-to-end review process. This customer experience is assessed through a quality assurance approach, where the calls are monitored and listened to by a supervisor in real time or at the end of the month to ensure the borrower is given a consistent message.

While the FCA review highlights numerous positive aspects of the arrears management process, inevitably there also areas where firms could improve.

In particular, the FCA found isolated cases of harm where further regulatory action may be necessary. These included customers who were unable to recover from their arrears position and whose debt levels continued to grow.

Data management and data integrity are key elements of a DBRS operational review, specifically when focusing on UK residential mortgage-backed securities (RMBS) transactions. Incomplete record keeping reflects badly on the lender and/or servicer and may cause borrowers to become disengaged through having to repeat information numerous times, leading to a subsequent lack of engagement and potential foreclosure.

Furthermore, the lack of data collected at the time of origination and throughout the lifetime of the mortgage loan by the lenders and servicers could have a negative impact on the initial RMBS analysis. For securitisations involving a relevant proportion of loans that were restructured or are currently in arrears, DBRS typically receives the payment history of mortgages in arrears, forbearance measures applied and any litigation history. This data is currently neither part of regular investor reporting nor included in updated portfolio cuts and this leads to challenges when assessing RMBS transactions. Typically, this issue emanates from the over-standardised categories of forbearance measures applied with respective success or failure rates.

Such challenges also extend to reporting on the litigation process including possession and foreclosure of the mortgage loan. Notwithstanding these challenges, greater transparency of data will mean a finer assessment of potential risks of loss in RMBS portfolios.

A further area of concern from the review relates to vulnerable customers. Such customers are a key area of review by the FCA under its statutory competition objective where the FCA considers how easy it is for consumers to access financial services. Any consumer can become vulnerable at any time in their life, for example through serious illness, loss of income or bereavement. The FCA expects firms to pay attention to possible indicators of vulnerability and have policies in place to deal with consumers who may be at greater risk of harm. Within the thematic review, the FCA notes inconsistent levels of handling vulnerable customers where customers did not receive the appropriate level of support nor did they receive assistance when completing detailed forms.

DBRS notes that a selection of firms have dedicated teams who deal specifically with vulnerable customers. This is seen as best practice; however, compliance with the Mortgage Code of Business rules when dealing with customers with mortgage arrears is imperative.

The FCA’s findings are consistent with the views of DBRS with respect to third-party mortgage servicers in the UK as determined by DBRS’s review of mortgage servicers outlined in its “Operational Risk Assessment for European Structured Finance Servicers” methodology.

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