Current Mortgage regulation, the Mortgage
Code and CAT standards
At present, the regulation of mortgages is fragmented and steps are in hand to consolidate it. Whilst the Financial Services Authority (FSA) regulates the institutions concerned with investment, as I write, mortgages are still largely regulated by a voluntary code, but this will change.
The government has stated its intention to bring mortgage lenders into the regulatory framework of the Financial Services Authority (FSA) with a new set of regulations for advertising. The aim, according to the Treasury Secretary, is to give consumers clear, comprehensive and comparable information in order to drive up standards, cut costs, improve competition and to improve consumers’ ability to make informed choices.
In the meantime, the Mortgage Code is in place and its main features from the borrowers’ standpoint are summarised below.
From 30 April 1999, every prospective mortgage customer will be given a copy of the “You and your mortgage” leaflet at the earliest contact they have with the lender (or intermediary). The shorter leaflet has been recently redrafted and is reproduced as follows: -
YOU AND YOUR MORTGAGE
The mortgage code provides protection for you as a mortgage borrower. It sets out minimum standards which mortgage lenders and intermediaries have to meet. This leaflet is designed to introduce the mortgage code to you.
The mortgage code
By giving you this leaflet, your lender or intermediary is confirming to you that they keep to the principles of the mortgage code. This provides important protection for you, as the code sets out:
If a lender or intermediary fails to meet the standards of the code, and you suffer as a result, you have the right to compensation under a compulsory independent complaints scheme.
The rest of this leaflet concentrates on the details, which are most relevant to you when you are arranging a mortgage. We then give you an outline of the code's main commitments. You can use this leaflet as a checklist to help you through the process of arranging a mortgage.
Choosing a mortgage
There are three different levels of service which your lender or intermediary may provide to help you choose a suitable mortgage. The lender or intermediary will tell you, at the beginning, which of these levels of service they can provide. The levels are:
Check that you understand which level of service you are being offered, and what this means for you.
Whichever level of service they provide, your lender or intermediary should give you information on all the following areas of the mortgage you are considering -
If you are using the services of a mortgage intermediary to arrange the loan, they must also tell you if they are receiving a fee from the lender for introducing the mortgage to the lender. They must also let you know whether they usually arrange mortgages from a number of selected lenders or from the market as a whole.
Before your mortgage is completed, your lender or intermediary will confirm, in writing, the level of service they have provided, and the reasons for any mortgage recommendation (if they gave you one). Check that you fully understand this written confirmation, and ask if there is anything that is still not clear to you at this stage.
The Code's main commitments
The code has 10 main commitments. Broadly speaking, these say that lenders and intermediaries will:
The code goes into more detail on each of these commitments.
Keeping to the code
How the lenders or intermediaries keep to the mortgage code is monitored independently. And, any organisation under the code must be a member of a recognised complaints scheme - such as the Banking Ombudsman, the Building Societies Ombudsman, or the Mortgage Code Arbitration Scheme. This gives you an extra level of protection, as each of these schemes can award compensation of up to £100,000 to you if you suffer as a result of your lender or intermediary failing to keep to the code. Your lender or intermediary will be able to tell you which scheme applies.
The full mortgage code is also available on the Council of Mortgage Lenders’ website www.cml.org.uk.
In early April of 2000, the Treasury announced a CAT standard for mortgages. CAT stands for Charges, Access and Terms. It is a voluntary standard and the objective to set a standard product type which was supposed to incorporate the most desirable features from the consumers’ perspective and includes the following main elements: -
No arrangements fees
or MIG premiums
Interest calculated daily (not the same as compounded daily)
Full credit given for all payments made
No fees paid to brokers
All other fees disclosed
No redemption charges outside a fixed rate period
No redemption charges at all for variable rate mortgage
No redemption charges if you stay with the same lender when you move home.
Interest (for variable rate loans) to be no higher than 2% above Bank of England base rate.
Falling rates to take effect within a month of a base rate fall.
Any customer may
Minimum loan is £10,000
The lender’s normal lending criteria must apply
You can choose to make repayments on any day of the month
You can make early repayments at any time.
All advertising and
paperwork must be straightforward, fair and clear
You do not have to buy any other product to get a CAT standard
If you are in arrears, you still pay normal interest on the debt.
The CAT rules are still in an experimental
stage. Ironically, the cost of such
loans may turn out more than for non-CAT loans since offsets are not possible:
in other words commissions on related policies, protection from mortgage
indemnity guarantee (MIG) premiums or discounted interest rates protected by
redemption charges. For example, if
a lender cannot charge for a MIG premium for a high LTV loan, the interest rate
must be increased to compensate.