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For many consumers, a mortgage is their biggest financial commitment, and the Government’s approach aligns with the FCA’s expectation that lenders will grant flexibility on mortgage repayments as a way of protecting consumers.
We have set out below some of the legal and regulatory considerations for mortgage lenders to consider when putting in place a payment holiday with a borrower or setting-up an alternative forbearance arrangement.
This is an unprecedented and fast moving situation and this note is based on the Government guidance at close of business on 18 March 2020.
The latest indications are that the Government’s proposals apply to residential mortgages (it is currently unclear whether or not second charge lending will be included – given the purpose of the proposals we expect that it will) and buy-to-let loans, where a landlord has tenants who are experiencing financial difficulties due to Covid-19.
It is unclear from the Government announcement who will be eligible for an automatic payment holiday. The offer of a payment holiday may be made to borrowers not already in arrears and up-to-date with their payments.
The Government’s proposals do not appear to override the bulk of the FCA rules on arrears management and forbearance (other than the FCA will now allow firms the ability to offer forbearance without an income and expenditure assessment of the borrower’s circumstances), which require lenders to ensure that any forbearance offered enables recovery of full payment arrears, minimises the long term impact of arrears, and that the mortgage remains affordable and sustainable.
If structured as a payment holiday, no payments will need to be made by the borrower during the period, and the account should not be treated as being “in arrears” for the period. Interest can continue to accrue during the payment holiday, and the borrower will remain liable for the accrued interest once the payment holiday comes to an end.
For lenders who already offer payment holidays to customers as an additional product feature the terms on which a payment holiday would be offered and how this would operate will (in the case of a regulated mortgage contract) have been set out in the ESIS, offer document and T&Cs. The ESIS requirements (where a mortgage includes a payment holiday as an additional product feature) are a useful guide to the types of information that a lender should be providing to a borrower when agreeing a payment holiday.
A number of lenders, particularly in the specialist lending sector, may not offer this feature and so existing mortgage documentation may not contemplate offering the customer a payment holiday, the conditions under which it would operate etc. Lending systems may also not be set-up for this. Lenders in these circumstances should consider their options carefully and we would be happy to discuss with lenders how they should approach this.
It is important that when providing a borrower with information about the payment holiday (or alternative forbearance option) they are aware of the impact of their decision and what it means for their mortgage payments, term or account balance e.g. in the case of a payment holiday that these payments will ultimately still need to be made.
As highlighted above the Government’s proposals do not appear to override the FCA rules on arrears management and forbearance (other than the FCA will now all firms the ability to offer forbearance without an income and expenditure assessment of the borrower’s circumstances), so it will be important that lenders work to achieve the right customer outcome in each borrower’s circumstances.
If a customer is already in arrears or forbearance, lenders will need to consider the full suite of forbearance options that are ordinarily available to customers under existing rules and ensure whatever measures they introduce the right customer outcome, for example, they do not inadvertently worsen a borrowers arrears position. This could include determining whether, given the individual circumstances of the customer, it is appropriate to:
There will of course be a range of other forbearance tools that a mortgage lender may decide is appropriate in the circumstances (for example, for term-expired cases), so lenders will need to consider which approach/combination of approaches will lead to the best customer outcome.
Where a customer has already been identified by a firm as a vulnerable customer and/or has existing arrears/forbearance treatment on their account, it will be important that lenders consider any impact of Covid-19 on their current circumstances and the arrangements that are already in place and respond to this appropriately.
Lenders will need to develop a process to contact the customer and assess their circumstances to agree an arrangement to pay, which will both need to be affordable and minimise the build-up of arrears. Lenders will need to be careful to ensure that they don’t automatically capitalise a payment shortfall, unless agreed with the borrower.
The Government has indicated that agreeing a payment holiday should not impact a borrower’s credit rating. Guidance is expected from CRAs on how this should be reported.
On the basis accounts in this payment holiday will not be regarded as being “in arrears”, FCA regulatory reporting will need to reflect this.
Lenders should check the terms of their own funding arrangements and speak to funders to ensure that flexibility they offer to customers in these circumstances (particularly where this goes outside preapproved policies or their original loan terms) does not put them in breach of their funding arrangements.
We appreciate that this is an unprecedented and fast moving situation and experts in our mortgage regulatory, mortgage litigation and mortgage enforcement/recoveries teams are available over the next few days and weeks to discuss some of the considerations highlighted in this note and to help you to put in place the arrangements you need to respond to increasing borrower demand for payment holidays or alternative forbearance options.
Please contact us and we would be happy to set-up a video conference/call with you.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions
19 March 2020
Insights 17 APRIL 2020