Responsible lending has yet to become automatic practice among many sub-prime mortgage lenders and intermediaries, the Financial Services Authority (FSA) has found.
When selling mortgage products to customers with 'black marks' on their credit records, lenders and intermediaries need to take more stringent action to only lend to customers who can afford it, the FSA urged.
Although evidence of mis-sale was not uncovered, one-third of the 34 intermediaries' files surveyed showed they were conducting sub-standard assessments of customers' ability to afford the loan.
Borrowers could all too often find themselves with a repayment burden they cannot afford, a finding confirmed by Citizens Advice, which remarked that it often sees customers fall into arrears with sub-prime mortgages soon after taking out the loan.
Meanwhile, none of the 11 lenders surveyed covered all the relevant considerations regarding responsible lending in their policies.
"Consumers should make sure they understand the risks, costs and charges when taking out a sub-prime mortgage, particularly at a time when interest rates are rising," warned Clive Briault, managing director of retail markets.
Five of the firms surveyed by the FSA have been referred for enforcement action.
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