25 October 2008

Affordability is Key

The effect of NINJA mortgages (no income, no job or assets) in the United States is widely credited to be the source of the current credit crunch. In the UK, the Financial Services Authority (FSA) stated when it was originated that affordability is the key to any lending that they formed a number of regulations to prevent excessive lending and the practice of granting mortgages to people who could not afford it.

There are a number of acts to regulate mortgage advice and prevent this type of mi-selling and they are listed below:

The Financial Services and Markets Act (2000) creating the FSA.

The Regulated Activities (Amendment) Order 2003 SI 1475, by which the Treasury gave responsibility for regulated mortgage lending and related activities to the FSA from 2004.

FSA rules requiring lenders to take account of a "customer's ability to repay" (Mortgage Conduct of Business (MCOB) 11.3.1 R) as well as maintaining a "responsible lending policy" (MCOB 11.3.4 R).

The FSA rules cover the whole mortgage selling process and states that consumers should be advised on suitability. In assessing whether a mortgage is suitable, the affordability of that mortgage is the key criteria.

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