While the Financial Policy Committee decision to drop lender affordability stress tests was expected, it is difficult to find articles that support the timing of the decision. When the restrictions were introduced in 2014, the intention was to prevent general loosening of credit assessments with the worry that reckless lending could cause an economic downturn and put financial stability at risk. That of course had happened before the global financial crisis in 2008.
The FPC message today is that regulation via the FCA and MCOB, will be sufficient to control the risks. The loan-to-income limit (LTI), also introduced in 2014, will be retained, limiting the number of mortgages that can be approved at LTI ratios greater than 4.5 times salary. The FPC argue that “the LTI flow limit is likely to play a stronger role than the affordability test.”
The consultation to remove the stress test found that most responders supported the proposal – no surprise there! We know many lenders found the requirements were constraining their lending. On the other hand, we also know funders welcomed the stress test as a regulator backed constraint on reckless lending.
This move means funders will now have to ‘police’ their own risk appetite positions around affordability stress testing, as they will no longer be able to rely on MCOB which specifically referred to the FPC stress test. Funders will need to understand the stress modelling adopted by the lenders they fund and adopt robust checks and balances to ensure that the lenders comply with the stress tests agreed in their funding arrangements. So, the issue whilst appearing to affect lenders only, is not that simple; funders need to act now to assess these risks too.
Rockstead can help with this analysis and build the appropriate processes to ensure funders are not exposed to greater risks as a result of this change. To learn how we can help please give us a call.