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Mortgage Payment Deferrals: FCA guidance consultation on exit strategies

On 22 May 2020, the Chancellor announced an updated package of measures to support mortgage customers still struggling with the impact of Covid-19.

In response the FCA has issued a consultation on new guidance for mortgage lenders setting out options firms will be required to provide to customers coming to an end of a payment holiday, as well as those who are yet to request one.  We have set out below some of the legal and regulatory considerations for mortgage lenders to consider in relation to the guidance being consulted on and assuming it is finalised in substantially its current form.

The FCA is inviting feedback on the consultation by 5pm on Tuesday 26 May 2020 and expects to finalise the guidance shortly thereafter.

This is an unprecedented and fast moving situation and this note is based on guidance consultation and press releases issued by the Government, PRA and FCA on 22 May 2020.

What are the key messages?

  • For customers who have not yet had a payment deferral, the application window has been extended to 31 October 2020.
  • The guidance refers to ‘payment deferral’ instead of ‘payment holiday’ and now contemplates ‘partial payment deferrals’, where the firm permits the customer to make reduced payments of any amount, particularly for customers unable to resume full payments at the end of their current deferral period.
  • To ensure the fair treatment of customers, firms should distinguish between three cohorts of customers.  Those who:
  1. are able to resume full payments immediately;
  2. are currently unable to resume full payments due to circumstances arising out of Covid-19;
  3. had a payment shortfall prior to 20 March 2020.
  • The FCA is clear in its press release and the guidance consultation that firms should pay particular attention to the needs of their vulnerable customers, and to provide information on where to access help and advice.  

Who will the new guidance apply to?

The guidance applies to mortgage lenders, mortgage administrators, home purchase providers and home purchase administrators in the exceptional circumstances arising out of Covid-19. 

Payment deferral vs payment holiday – why the change in terminology?

The guidance now refers to a ‘payment deferral’ rather than a ‘payment holiday’.  Although the FCA continues to refer to a ‘payment deferral’ in similar terms to a ‘payment holiday’, the proposed guidance now contemplates a lender being able to offer a ‘full payment deferral’ (i.e. where the firms permits the customer to make no payments during that period), or a ‘partial payment deferral’ (i.e. where the firm permits the customer to make reduced payments of any amount during that period). This appears to reflect experience in the market that customers’ would prefer to pay something where they can each month, even if not the normal contractual monthly instalment.

Customers who have not yet had a payment deferral

The FCA has extended the application period for a payment deferral until 31 October 2020.  This means that customers who have not yet had a payment deferral who are experiencing or reasonably expect to experience payment difficulties as a result of circumstances relating to Covid-19 can apply during this period. 

As before, the FCA’s expectation is that a lender should grant a customer a full payment deferral for 3 monthly payments, unless it can demonstrate it is obviously not in a customer’s best interests.  Further guidance is given on circumstances where granting a 3 month payment deferral would not be in the customer’s interests.  If a 3 month payment deferral is not considered appropriate, firms are expected to offer other ways to provide temporary relief to the customer in accordance with the obligation to treat customers fairly.

Customers who are reaching the end of the payment deferral period

To ensure the fair treatment of customers coming to the end of a deferral period, firms should distinguish between three cohorts of customers.  Those who:

  • are able to resume full payments immediately;
  • are currently unable to resume full payments due to circumstances arising out of Covid-19;
  • had a payment shortfall prior to 20 March 2020.

Customers able to resume full payments

Firms will need to provide these customers with information about how to access different options to repay in good time before they are bound by any default option (such as automatic capitalisation).  This can be provided through a digital or scripted process.  Where possible under the terms of the mortgage contract, these options should include a lump sum payment or a term extension.

Where customers do not engage with lenders about their options when the payment deferral expires, the default option for many lenders is likely to be automatic capitalisation and firms will need to ensure that they have given the customer appropriate information (in line with the guidance) before doing this and that they have appropriate systems and controls in place to identify if a customer misses their first payment when payments restart (see the section on systems and controls below)

Firms will need to ensure that they have systems in place to contact customers who subsequently miss a payment, including where they start making repayments again and subsequently their circumstances change and they need further support.

Customers unable to resume full payments

Where a customer indicates they cannot immediately resume full payments, firms should offer them a further full or partial payment deferral for 3 monthly payments, based on what the customer considers they can currently afford to repay.  The FCA is clear that a firm should not depart from this unless it can demonstrate that such a deferral is obviously not in the customer’s best interests and a different option is more appropriate (such as reducing or waiving interest, a term extension or an alternative product).

This places more emphasis on lenders making available a further payment deferral (either full or partial) than was expected and aligns with the HM Treasury press release which emphasises that this will be one of the options available. 

In determining the appropriate customer treatment, firms may also wish to consider the PRA statement issued on 22 May 2020, which distinguishes between temporary and longer term financial impact in the following way:

  • Borrowers who do not resume full payments due to direct Covid-19 related issues that can reasonably be expected to be temporary for example, a borrower suffering a temporary reduction in income due to being furloughed but whose income and financial position can reasonably be expected to return to levels allowing full payment resumptions once Covid-19 restrictions are lifted.In such circumstances, the PRA states that firms might reasonably conclude that such borrowers are facing short-term liquidity problems rather than longer-term financial difficulty.
  • Borrowers who do not resume full payments due to financial difficulty that is likely to be more long term (for example, the borrower is made redundant and is unlikely to have sufficient sources of income to resume payments in the longer-term).For these borrowers, firms might reasonably conclude that the concessions offered are due to the borrower being in longer-term financial difficulty.

Lenders will need to carefully assess how they consider what is in the customer’s best interest.

The guidance also deals with circumstances where a customer requests a partial payment deferral and contacts the firm seeking further assistance before the end of the deferral period.  A frequently asked question across the market.  The FCA indicates that the firm should offer them additional support for the remaining period of the deferral in line with this section. This could include extending the deferral period to 3 months, reducing the agreed payment further, or a full payment deferral to the 3 months.

The FCA guidance includes further steps firms should take to signpost customers to sources of free debt advice.

Customers who had a payment shortfall prior to 20 March 2020

Customers who had a payment shortfall prior to 20 March 2020 who have not yet had a payment deferral, may request one in line with the guidance.

For this cohort of customers, rather than adopting the approach to exit outlined above, firms will need to consider the requirements of MCOB 13.  This may include considering a further payment deferral (particularly where they have already benefitted from one).  Firms also need to note that MCOB 13 prevents a firm from automatically capitalising a payment shortfall where the impact would be material.

Systems and controls

The FCA guidance notes that firms should ensure they keep appropriate records of how the exit strategy process was designed and implemented (including customer communications) and that staff are adequately trained to implement the strategy.  The FCA guidance is also clear that feedback on exit strategy processes and customer treatment should be regularly reviewed to ensure that it is delivering good customer outcomes and adapted as necessary to respond to feedback/outcomes of internal monitoring activity.

Senior management function holders in particular should ensure that appropriate governance arrangements and systems/controls are in place in relation to development and implementation of the firm’s exit strategy and that these are regularly reviewed.  It is likely that this will be the subject of engagement between firms and FCA supervisors, particularly the processes that firms have in place to ensure that the exit strategy is delivering good customer outcomes.

Treatment of vulnerable customers

The FCA is clear in its press release and the guidance consultation that firms should pay particular attention to the needs of their vulnerable customers, and to provide information on where to access help and advice. 

Given the significant number of mortgage customers who have been granted a payment holiday across the market, we understand a number of lenders will be exploring digital tools to enable certain cohorts of customer to ‘self-serve’ in relation to their preferred exit from the payment deferral period.  If using digital channels, firms will need to make it easy for customers less able to use these to access alternatives.

Moratorium on repossession

The FCA guidance indicates that firms should not commence or continue repossession proceedings against customers before 31 October 2020 and should ensure that customers are kept fully informed, and discuss with them the potential consequential impacts of their suspending any move towards repossessions.

Next steps

The FCA is inviting feedback on the consultation by 5pm on Tuesday 26 May 2020 and expects to finalise the guidance shortly thereafter.

How can TLT help?

We appreciate that this is an unprecedented and fast moving situation and experts in our mortgage regulatory, mortgage litigation and mortgage enforcement/recoveries teams are available over the next few days and weeks to discuss some of the considerations highlighted in this note and to help you to put in place the arrangements you need to implement the payment deferral exit strategy. 

Please contact us using the details below and we would be happy to set-up a video conference/call with you or your wider team.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions

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