New Mortgage Charter to support residential mortgage customers
In light of the current pressures on households from inflation and interest rate rises, and following the commitments agreed to support mortgage loan borrowers in December 2022, on 23 June 2023 HM Treasury announced that it had agreed new support measures for mortgage holders with the FCA and the UK's principal mortgage lenders (covering over 75% of the market). For more on the December 2022 commitments, take a look at our Engage article 'UK FCA consults on mortgage support guidance as cost of living starts to bite borrowers'.
According to the Chancellor, Jeremy Hunt, there were two groups of people that the government was particularly worried about: (1) people who are at real risk of losing their homes because they fall behind in their mortgage payments; and (2) people whose fixed rate mortgage is coming to an end, who are concerned about the impact on their family finances of higher mortgage rates.
The Mortgage Charter policy document, which was published by HM Treasury on 26 June 2023, contains more details of the set of standards that lenders will adopt when helping their regulated residential mortgage loan borrowers worried about higher rates. Key points include:
- Anyone worried about their mortgage repayments can contact their lender for help and guidance, without any impact on their credit file, and they are encouraged to contact their bank who are there to help.
- Support for mortgage loan customers who are up-to-date with payments (representing 97% of the mortgage market) to switch to a new mortgage deal at the end of their existing fixed rate deal without another affordability check.
- Lenders will provide well-timed information to help customers plan ahead should their current rate be due to end.
- Lenders will offer tailored support for anyone struggling and will deploy highly trained staff to help mortgage loan customers. This could mean extending their term to reduce their payments, offering a switch to interest only payments, but also a range of other options like a temporary payment deferral or part interest-part repayment. The right option will depend on the mortgage loan customer’s circumstances.
- Mortgage loan borrowers will not be forced to leave their home without their consent unless in exceptional circumstances, in less than a year from their first missed payment.
- Customers approaching the end of a fixed rate deal will have the chance to lock in a deal up to six months ahead. They will also be able to manage their new deal and request a better like for like deal with their lender right up until their new term starts, if one is available.
- There is a new deal between lenders, the FCA and the government permitting customers who are up to date with their payments to:
- switch to interest-only payments for six months; or
- extend their mortgage term to reduce their monthly payments and give customers the option to revert to their original term within 6 months by contacting their lender.
- Customers who are currently in arrears should continue to work with their lender for the support that they need.
- The commitments in the Charter do not apply to buy-to-let mortgages.
- The PRA has confirmed that the measures agreed in the Mortgage Charter are not expected to lead to an immediate or automatic increase in capital requirements for banks, depending on the circumstances.
Changes to MCOB responsible lending, affordability and disclosure requirements to implement the Mortgage Charter
The FCA subsequently published a policy statement (PS23/8) and The Mortgage Affordability Rules (Amendment) Instrument 2023 containing enabling provisions for the Mortgage Charter. All changes came into effect on 30 June 2023. In summary, the FCA:
- amended the responsible lending rules in MCOB 11.6 to enable mortgage lenders to meet their commitments under the Mortgage Charter. The changes are aimed at securing an appropriate degree of consumer protection by enabling lenders to offer customers swift, temporary reductions in payments and for customers to make an informed choice on their options; and
- provided limited exemptions from its affordability requirements, enabling lenders to allow mortgage loan borrowers (except for second charge and bridging loan customers) to:
- reduce their capital repayments (including to zero and paying interest only) for up to six months; and/or
- fully or partly reverse a term extension within six months of it taking effect.
Both options can be offered without a new affordability assessment by lenders. However, mortgage lenders will still need to assess affordability if a mortgage loan borrower wants to permanently convert their mortgage to an interest-only mortgage or extend the mortgage term beyond their expected retirement date.
On 24 July, the FCA announced that it was introducing temporary regulatory forbearance on MCOB 7.6.28R. This will allow firms time to bring their systems into compliance where they are currently unable to provide the disclosure required under MCOB 7.6.28R, when giving effect to the new options under MCOB 11.6.3(3)(a) and (b)). The FCA recommends that where a firm cannot fulfil the disclosure requirement it should provide as much of the required disclosure as possible, in a durable medium, and expects mortgage lenders to have introduced a compliant approach as soon as possible, and in any event by the end of January 2024.
On-going FCA consultation on changes to create stronger framework to support mortgage loan borrowers in financial difficulty
The FCA also consulted on incorporating aspects of the Tailored Support Guidance (TSG) introduced during the COVID-19 pandemic into its Consumer Credit (CONC) and Mortgages (MCOB) sourcebooks, as well as proposals for targeted additional changes to support consumers in financial difficulty. The consultation closed on 13 July 2023. See our Engage article 'UK FCA consults on changes to create stronger framework to support borrowers in financial difficulty' for more on those proposals.
What will be the impact on securitisation transactions?
Participating mortgage lenders, led by UK Finance, have launched a communications campaign ensuring mortgage loan borrowers know what to expect when they contact their lender. This has so far resulted in more widespread uptake in the support than was the case with previous consumer support schemes. Parties on both the funder / investor and originator side of mortgage-backed securitisations should therefore by this point be aware of the potential impacts on the risk profile of any given pool of residential mortgage loan receivables. These adjustments will need to be considered when drafting securitisation transaction documents and prospectuses, but also in relation to existing deals.
Eligibility criteria are typically used to determine which mortgage loans can be sold into a residential mortgage-backed securitisation. Consideration will need to be given to whether the newly-permitted relief measures will, if granted by the relevant mortgage lender in respect of a mortgage loan, result in a breach of the relevant eligibility criteria and therefore disqualify that mortgage loan for purposes of calculating a borrowing base for the transaction. For example, some transactions include an eligibility criterion that no matter existed at the time a particular mortgage loan was advanced which would enable the mortgage loan borrower to withhold or delay any payments under the mortgage loan. If a mortgage lender signs up to the Mortgage Charter and therefore offers customers the option to switch to interest-only payments for six months (reducing capital payments), it may become in breach of this eligibility criterion, unless a particular carve out is included, or waiver requested, in this respect.
Transaction documents also often contain concentration limits concerning the number of interest-only mortgage loans that can be contained in a particular mortgage loan portfolio. If mortgage loan borrowers switch to interest-only payments for six months in accordance with the Mortgage Charter, this eligibility criterion may also be breached, resulting in a change to the borrowing base. A key point to consider in this respect is whether and how interest-only mortgage loans are defined in the transaction documents. If they are defined as mortgages for which the current regular payments made by the mortgage loan borrower cover interest only, then the mortgages could breach such criteria if interest-only payments are newly offered under the Mortgage Charter. However in the event that the transaction documents do not define an interest-only mortgage, the FCA handbook provides a definition: “a regulated mortgage contract other than a repayment mortgage”, with a repayment mortgage defined as one “under which the customer is obliged to make payments of interest and capital which are designed to repay the mortgage in full over the stated term”. Under this definition, repayment mortgages placed on six-month interest-only payment plans would not qualify as interest-only mortgages, as these mortgages will still be repaid in full over the stated term.
Facility agreements may also classify mortgage loans as ineligible, defaulted or delinquent if their term is extended. The amendments to MCOB relaxing the affordability requirements will make it easier for mortgage loan borrowers whose lenders have signed up to the Mortgage Charter to extend their mortgage term to reduce their monthly payments and then revert back to their original term. The ratios of mortgage loans classed as ineligible within the portfolio as a result of such extensions could therefore be affected at relatively short notice, again depending on the drafting and whether any carve out is included or waiver requested.
Servicers will also need to take the Mortgage Charter into account when carrying out their obligations under their servicing agreements. The drafting of the servicer standard of care in servicing agreements will be important in this respect. Servicing agreements typically state that the servicer should manage the mortgage loans to the standard of a well-informed and prudent mortgage lender, abiding by good industry practice. As at 28 July 2023, the Government’s policy paper stated that approximately 90% of lenders in the mortgage market had signed up to the Mortgage Charter. Whilst the Mortgage Charter is not binding legislation, and servicers typically act for the issuer rather than the original mortgage lender, this rate of take-up amongst mortgage lenders is likely to result in changes to good industry practices, in order to be in compliance with their servicing standard, including offering the forms of relief enabled by the above amendments to MCOB, which servicers will arguably be required to abide by.
The Mortgage Charter itself also sets certain standards of support to be provided by mortgage lenders to mortgage loan borrowers, such as the provision of well-timed information to help customers plan ahead should their current rate be due to end. Whilst the provisions of the Mortgage Charter are not enforceable legislation, these standards overlap with the new FCA Consumer Duty, which came into effect on 31 July 2023. As firms carrying out regulated and ancillary activities, mortgage servicers should be aware of their duties to mortgage loan borrowers under the new Consumer Duty legislation. In particular, they must have regard for both the consumer understanding and consumer support outcomes, and this will arguably include taking into account the recommendations of the Mortgage Charter. For further information on other measures introduced by the UK government to ensure consumers are being treated fairly and help those struggling to make payments, please see our Engage article ‘UK cost-of-living crisis: new Government/FCA measures to help consumers with savings and mortgages’.
On public deals, risk factors may also need to be updated (potentially via a supplementary prospectus) in order to provide details of the measures introduced, to confirm whether the originator is a signatory to the Mortgage Charter and to highlight that any further changes brought in by the FCA or UK government to assist consumers with cost-of-living pressures could affect the performance of the underlying portfolio.
The lender signatories to the Mortgage Charter, UK Finance and the FCA committed to implementing it in full at pace, hence the FCA’s introduction of the above changes to MCOB without consultation. The FCA will review the impact of the changes within 12 months of publication, so by the end of June 2024. The FCA is also planning to update its March 2023 finalised guidance for firms supporting their existing mortgage borrowers impacted by the rising cost of living (FG23/2) as soon as possible in light of the changes.
The FCA’s Consumer Duty entry into force on 31 July 2023 also enabled the FCA to support implementation of the Charter by its signatories.
Securitisation market participants should therefore also monitor further publications by the FCA and UK government in case additional forbearance measures are extended to any other consumer asset classes such as credit cards, as was the case during the Covid-19 crisis.
Authored by Julian Craughan, Roger Tym and Isabel Tinsley.
This note is for guidance only and should not be relied on as legal advice in relation to a particular transaction or situation. Please contact one of the contacts listed here if you require assistance or advice in connection with any of the above.