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OFT issues guidance for second charge lending
88-09 22 July 2009
The OFT today published guidance on standards expected from businesses engaged in second charge lending.
Download OFT guidance for lenders and brokers (pdf 105 kb).
Download Q&A (pdf 62 kb).
Second charge loans - sometimes referred to as 'homeowner' loans - involve consumers with an existing mortgage taking out a further loan secured against their home. Firms offering or arranging such loans must be licensed by the OFT. In order to hold a licence, a business must satisfy the OFT that it is fit to do so.
Second charge loans are often used by those who may have difficulty in obtaining credit by other means. Last year, the size of the market was estimated to be approximately £3bn, with the average loan size around £20,000.
The guidance sets out the minimum standards the OFT expects from businesses engaged in second charge lending if they are to be considered fit to hold a licence. It covers the entire lending process including selling techniques, customer care, and practices around the management of arrears.
Ray Watson, OFT Director of Consumer Credit, said:
'Second charge lending is considered a high-risk activity by the OFT given the risk that borrowers could end up losing their homes if they default on payments.
'All businesses operating within this sector should act with appropriate regard to consumer protection and fair business practices. Our latest guidance reflects this, and we expect all firms within the sector to comply with it.'
NOTES
1. Draft guidance on this document was issued for consultation in February, and comments received from interested parties during the consultation have been taken on board in the production of this final document.
2. The guidance follows a government review of arrears and repossession policies and practices in the second charge sector. The review did find examples of good practice within the market but, as with other lending markets, there is scope for spreading good practice more widely. The Government announced the OFT's intention to issue guidance in the 2008 Pre-Budget Report. The full report is available on the Treasury website.
3. Defaulting on a second charge loan (or other subsequent secured loan) can ultimately lead to possession and if there is a shortfall in funds, the debtor can still be left with a debt following loss of their property.
4. The Financial Services Authority (FSA) regulates first charge mortgages.
5. The Consumer Credit Act 1974 requires businesses that offer goods or services to consumers on credit and/or are involved in activities relating to consumer credit or consumer hire to be licensed by the OFT. Following implementation of the OFT's new powers under the Consumer Credit Act 2006 on 6 April 2008, businesses could also have specific 'requirements' imposed on them by the OFT if OFT has grounds to be dissatisfied with the business. If such a requirement was not complied with, the business concerned could be subject to a financial penalty of up to £50,000. The OFT can also refuse or revoke a licence if it decides that a trader is not fit to hold one. The OFT can take into account any circumstances which appear to be relevant when considering the fitness of an applicant or licensee, including evidence that the company has contravened guidance published by the OFT.
88-09 22 July 2009
The OFT today published guidance on standards expected from businesses engaged in second charge lending.
Download OFT guidance for lenders and brokers (pdf 105 kb).
Download Q&A (pdf 62 kb).
Second charge loans - sometimes referred to as 'homeowner' loans - involve consumers with an existing mortgage taking out a further loan secured against their home. Firms offering or arranging such loans must be licensed by the OFT. In order to hold a licence, a business must satisfy the OFT that it is fit to do so.
Second charge loans are often used by those who may have difficulty in obtaining credit by other means. Last year, the size of the market was estimated to be approximately £3bn, with the average loan size around £20,000.
The guidance sets out the minimum standards the OFT expects from businesses engaged in second charge lending if they are to be considered fit to hold a licence. It covers the entire lending process including selling techniques, customer care, and practices around the management of arrears.
Ray Watson, OFT Director of Consumer Credit, said:
'Second charge lending is considered a high-risk activity by the OFT given the risk that borrowers could end up losing their homes if they default on payments.
'All businesses operating within this sector should act with appropriate regard to consumer protection and fair business practices. Our latest guidance reflects this, and we expect all firms within the sector to comply with it.'
NOTES
1. Draft guidance on this document was issued for consultation in February, and comments received from interested parties during the consultation have been taken on board in the production of this final document.
2. The guidance follows a government review of arrears and repossession policies and practices in the second charge sector. The review did find examples of good practice within the market but, as with other lending markets, there is scope for spreading good practice more widely. The Government announced the OFT's intention to issue guidance in the 2008 Pre-Budget Report. The full report is available on the Treasury website.
3. Defaulting on a second charge loan (or other subsequent secured loan) can ultimately lead to possession and if there is a shortfall in funds, the debtor can still be left with a debt following loss of their property.
4. The Financial Services Authority (FSA) regulates first charge mortgages.
5. The Consumer Credit Act 1974 requires businesses that offer goods or services to consumers on credit and/or are involved in activities relating to consumer credit or consumer hire to be licensed by the OFT. Following implementation of the OFT's new powers under the Consumer Credit Act 2006 on 6 April 2008, businesses could also have specific 'requirements' imposed on them by the OFT if OFT has grounds to be dissatisfied with the business. If such a requirement was not complied with, the business concerned could be subject to a financial penalty of up to £50,000. The OFT can also refuse or revoke a licence if it decides that a trader is not fit to hold one. The OFT can take into account any circumstances which appear to be relevant when considering the fitness of an applicant or licensee, including evidence that the company has contravened guidance published by the OFT.
