Author: Bridget Carter

This year the Financial Services Authority revealed the extreme lengths some mortgage brokers will go to in an effort to secure a loan in the sub prime mortgage market. Sub prime customers range from those who have been declared bankrupt right down to those who might have missed just one credit card payment. But because the customers are considered risky, money lending companies use this to justify charging them higher-than-normal interest rates. As part of a probe into the sub prime money lending business this year, the FSA found three cases where brokers lied about an applicant’s income to secure the deal on the loan. As an outcome of this discovery, the firms involved have been referred to enforcement agencies for further investigation. And the FSA is not leaving it alone there. It plans to do more digging to see what else it can find going on in the highly lucrative business.

The three cases involving the mortgage brokers is a classic example of the desire within this part of the money lending industry to sign up sub prime customers into an agreement for more debt. These days, the sub prime market is worth £30bn a year. The money is too big to resist for both large finance institutions and smaller companies, which is why a growing number of big players in the finance industry want a slice of it.

The new players area banks like Deutsche, West LB and Investec. Lehman, GMAC and Merill Lynch have been lending to sub prime customers for some time.

It is estimated that the amount of UK sub prime residential mortgage backed securities issued rocketed from £5.9bn in 2003 to £12.1bn in 2005. It is expected that the number will continue to rise.

So what exactly is the FSA doing about it?

A spokesperson says it is taking a closer look at the advisers working on the scene to make sure they are collecting the right information to decide whether someone is adequately capable of taking on the burden of a mortgage.

“We want to assess whether mortgage advisers are taking reasonable steps to ensure that personal recommendations to enter into sub prime mortgage products are appropriate to the needs and circumstances of consumers. We also want to ensure that mortgage advisers are gathering all information likely to be relevant for the purpose of establishing the suitability of these products.”

In a recent investigation, the FSA examined 31 small mortgage firms and 210 customers who had borrowed with these firms.

It found that six in ten companies had not collected the information they should have to determine whether the applicant could pay back the loan and a further six in ten signed up customers who already had existing debts. Almost seven in ten were unable to prove they had considered an applicant’s previous situation when it came to their debts. Most companies could not justify how the mortgage met the applicant’s needs.

So don’t think that the authority is done with the matter. Another investigation is underway this summer. And there are bound to be more.

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