The FSA is set to clamp down on lenders selling sub-prime mortgages in a move that could lock people with low incomes and bad credit histories out of the mortgage market, warns City law firm Reynolds Porter Chamberlain LLP (RPC).
Sub-prime mortgages, which are offered to people with bad credit histories, irregular incomes and those who have been bankrupt in the past, are due to be the subject of an FSA review. The FSA says it will look at whether or not the mortgages are good value home loans, and if borrowers are being treated fairly throughout the loan term.
But RPC warns that an aggressive a campaign by the FSA could force sub-prime lenders to stop lending to people who find it hard to get a loan. RPC lawyer Robbie Constance says: “Where the FSA goes complaints and expensive reviews follow, as seen with pensions, endowments and, more recently, PPI.”
“To allow for the higher risks of sub-prime customers, mortgage providers impose higher charges and rates. The risk is that the FSA will view this as not ‘treating customers fairly’," he said.
“When lending to people with poor credit histories, a higher incidence of defaults is inevitable. Unless the FSA acts reasonably we could see a lot of lenders tangled up in their net.”
Mr Constance continues: “Despite warning customers and despite the fact this type of mortgage exists to help customers who would otherwise not be able to get on the housing ladder, the lender could still be open to a mis-selling claim for not treating the customer fairly when viewed with hindsight.”
Find out more about bad credit mortgages