Second Charge Lending
“Second charge lending” is the term used to describe a loan which is secured on a borrower’s home by a charge which is subordinate to any loan secured by a first (and thus higher-ranking) charge. It is currently regulated by the Financial Conduct Authority (FCA) under its Mortgages and Home Finance: Conduct of Business sourcebook.
Until 2016 second charge lending was regulated under the Consumer Credit Act (CCA). Responsibility for regulating the CCA transferred from the Office of Fair Trading to the FCA on 1 April 2014.
The Mortgage Credit Directive (MCD), an EU framework of conduct rules for mortgage firms, came into effect on 21 March 2016. The FCA was given powers in March 2015 through The Mortgage Credit Directive Order (SI 2015 No 910) to make rules for implementing the European Mortgage Credit Directive (MCD). The MCD does not distinguish between first- and second-charge mortgages, so the FCA consulted on proposals for bringing second charges into the MCOB sourcebook. The feedback Policy Statement, including final rules, was published in March 2015.
Current regulation of second charge lending
Second charge lending is regulated through MCOB. The following highlights some of the main requirements on lenders:
Conduct Standards: the rules on selling and advising came into effect for second charge lenders in March 2016.
Qualifications: second charge mortgage ‘sellers’ will be required to have gained a level 3 qualification (via CeMAP) by September 2018.
Data Reporting: second charge lenders must submit aggregate data to the FCA via the MLAR and RMAR, as well as Product Sales Data (PSD).
Interest rate stress test: Second charge lenders are required to stress test borrowers’ ability to pay in the event that rates increase – but will not be expected to ascertain the current rate being paid on a higher priority mortgage. Information about the outstanding balance and current repayment – which should be sufficient to undertake the necessary stress test – can be obtained via a credit reference search.
Binding Offers: The MCD requires lenders to issue “binding offers” to borrowers: the FCA has decided that such offers can include conditions such as those linked to a change in the facts and circumstances upon which the lender has based the decision to make the offer. However the FCA does not believe that reserving a blanket right to re-underwrite the loan would be compatible with the offer being binding. New guidance has been included in MCOB 6A.3.3(G) setting out the FCA’s expectations.
ESIS Language: The MCD prescribes the format and content of the ESIS, leaving little flexibility for the FCA to make changes. The exception is where the prescribed terminology in unclear or unfamiliar in a Member State – and the FCA has therefore replaced ‘reimbursed’ with ‘repaid’ and ‘exit charge’ with ‘early repayment charge’.
Time Orders: Time Orders will remain for both first and second charge mortgages: PERG 4.17.2G has been updated to make this clearer.
Post-sale disclosure for second charge mortgages: Changes to MCOB 6A clarify that a binding offer and reflection period requirements do not apply to post-sale variations.
Modifying Agreements: The MCOB approach to contract variations will be applied to second charge mortgages and so modifying agreements (and all the challenges they present) will no longer apply.
Awareness of other products: Borrowers looking to increase their borrowing should be made aware that a second charge or unsecured loan may be more appropriate, during initial disclosure at the start of the sale. There will be no requirement on the seller to consider whether the other options are more appropriate for the customer.
Debt consolidation: The MCOB debt consolidation requirements will be applied in all second charge cases (involving debt consolidation) irrespective of whether or not the customer is credit-impaired. In these cases, lenders will need to ensure that the debts to be consolidated are repaid or, where this does not happen, the debts are included in the affordability assessment.
Fees charged where customers are in difficulty: The automatic rolling up of fees and charges into a second charge loan are prohibited. NB MCOB 13.3.4D currently provides that: “In the FCA’s view, in order to comply with Principle 6, firms should not agree to capitalise a payment shortfall save where no other option is realistically available to assist the customer.”
Interest on default fees can only be charged on a simple basis (MCOB 12.5.5.R).
Sharing information on customers in repossession proceedings: The information to be shared between lenders in repossession cases (MCOB 13.4A.1 R) has been reduced to include notice of:
– The commencement of legal proceedings
– Surrender of the property
– Details of any proposed sale
– Details of any assisted voluntary sales process.
MCOB 13.4A.3G provides that firms should use reasonable efforts to discover the existence of other charge holders at the start of any assisted voluntary sale/litigation process.