Support after mortgage deferral ends should be reported on credit files
Credit reporting should resume as normal once payment deferral periods end, the Financial Conduct Authority’s finalised guidance for support offered to mortgage customers said.
If a customer is unable to reach an agreement for further support before the next payment is missed and this is subsequently reported to their credit file, firms should work with customers to rectify this so their credit status does not worsen further. The FCA said it expects this rectification to apply to no more than a single monthly payment.
All further forms of support offered to customers must be reported in credit files whether it follows a deferral or not.
Lenders should also keep note of the amount added to any existing shortfalls resulting from payment holidays so it can be identified that it was due to the pandemic. The regulator referred to this as ‘the deferral shortfall’.
However, as government support relating to the pandemic changes and evolves, it expected firms to be flexible in forbearance offered and employ both short and long-term support to struggling customers.
This may include short-term arrangements where a customer makes no or reduced payments.
Lenders should contact customers in good time before the end of their payment holiday, and treat them fairly regardless of whether they can continue to make payments as normal or if they expect to face difficulties. Then, firms should work with customers to resolve difficulties before payments are missed.
A one size fits all approach should not be applied and the FCA said the extension of a mortgage term, a change in the type of mortgage, or deferring payments due under the contract should be considered.
Lenders must be aware that some customers will be unable to make commitments to pay, especially if they are furloughed and unsure if they will remain in employment or if they work in a sector affected by local and national restrictions imposed to reduce the spread of the virus.
On the other hand, some customers may expect an improvement in their financial circumstances if restrictions have been lifted.
Forbearance should be reviewed regularly and before the end of an agreed period. One particular option of forbearance should not be repeatedly applied without reconsidering if it is still appropriate.
Additional arrangements or alternative options should be looked at if customers continue to struggle to make payments and other debts should be taken into account.
When considering if a property will be repossessed, lenders should remember that the shortfall took place during “exceptional circumstances” and the customer was not expected to address the shortfall during the deferral so may have had less time to do so.
Unless a customer is refusing to cooperate with a lender, no repossessions should take place without a client’s consent just because of a deferral shortfall, the FCA advised.
At the end of a payment deferral, if a firm agrees to a customer making no or reduced payments for a longer period without changing the sums due under the contract, this will result in a payment shortfall.
Lenders should also determine whether a customer should remain in possession of a property to sell if no reasonable arrangement can be made to help them with repayments.
Repossessions should also not take place if it is believed a customer is required to self-isolate or is in an area where a local or more widespread lockdown has been imposed. If alternative accommodation is available or they are able to adhere to restrictions, a repossession can go ahead.
Modes of communication
Firms can make use of digital and non-digital channels to communicate with customers, but if forbearance has been offered through a digital channel customers must be able to ask for help through non-digital means.
If operational difficulties affect a customer’s ability to receive support and results in a missed payment, the customer should be put in the position they would have been in if there were no technical issues. Customers should also not be charged default or arrears charges if this happens.
The FCA recommended the hiring of case handlers to record customer communications and refer to them to identify where a customer may be feeling stressed about their financial situation due to the pandemic.
Expectations around long or unpredictable waiting times during busy periods must also be managed, to avoid customers becoming disengaged when facing challenges contacting firms.
Those who are displaying signs of vulnerability should be treated fairly and all communication channels utilised to inform them of support available.
An overall review of the end-to-end process should be used so customer outcomes can be evaluated properly.
Second charge mortgages
The FCA said lenders should be mindful that a second charge mortgage could push borrowers into significant debt if they defer or fall behind with payments. Customers may struggle to repay the amount owed, especially where some second charges have high rates and where interest is charged on arrears, it is often applied on a compound basis where interest is charged on top of existing interest.
Deferring on their first charge mortgage can also put these customers into further debt.
For these borrowers, lenders should consider applying simple interest instead of compounding it or reducing rates charged on shortfalls, in some cases to zero per cent.
Christopher Woolard, interim chief executive at the FCA, said: “Some consumers will continue to be impacted by coronavirus in the coming months, or be impacted for the first time. Consumers in these situations will benefit from firms providing them with tailored support.
“However, it is very important that consumers who can afford to resume mortgage payments should do so for their own long-term interests and so that help can be targeted at those most in need.”