Many lenders used to be happy to lend on self-certification of income where the applicant had a good credit score and no adverse credit history. Others used simple income multiples to agree the amount they were prepared to lend. The great recession and the MMR meant that lenders had to take a new view on how much they would lend. This is despite the fact that arrears and possessions have been relatively low through the downturn. Now all lenders must verify applicant’s income in all cases. There were also new rules on expenditure to assess affordability.

The rules following MMR requires lenders to take account of the customer’s committed expenditure; their basic essential expenditure and the basic quality of living costs of the customer’s household. Most lenders have interpreted these requirements more rigorously than the FSA set out in the consultation and final rules. The relevant word in these rules is “basic”. Taking all actual costs into account and then stress testing the outcomes are steps further than the rules intended. For AMI it is clear that costs such as pensions are discretionary and can be flexed at points of financial stress. Unless being relied on for lending into retirement, they should not be taken into account. From a regulatory policy perspective it was clear that FCA wanted lenders to take contractual and essential expenditure into account and then undertake the required stress test.

Notwithstanding this, lenders are entirely within their rights to do what they consider to be right within their own risk appetite. They have to apply criteria that meet their own corporate risk appetite. But they should not try to hide behind the skirts of the FCA or blame MMR. If they have decided for commercial prudence to apply stricter criteria then they should have the courage of their convictions and stand fully behind their decision. If this is to improve the quality of their book then a degree of honesty might help.

However, we should not be arguing over this but lenders should be making clear their criteria. We now live in a predominantly intermediated market and it is essential that the things that differentiate lenders are explicit and published. AMI always argued for more transparency and visibility over criteria and this is still what is required.

Robert Sinclair