IT FOCUS: The impact of MMR on affordability assessment
By Dave Patel, managing director of DPR Consulting
Now that the dust is starting to settle on the Mortgage Market Review, it is becoming clear that the FSA is pressing ahead with plans to tighten the obligation on lenders to carry out a full and detailed affordability test, and although some concerns over evidence of income have been heeded, there are still a number of areas that may require lenders to re-work their systems and processes.
Under the new proposals, an assessment of affordability must include the applicants’ net income and their committed expenditure including mortgage payments and basic household expenses, all of which must be evidenced.
The lender must also carry out interest rate stress testing to establish the applicant’s ability to withstand future rate increases, with anyone choosing an interest-only mortgage having to be assessed on a repayment basis unless they have a verifiable source of capital repayment. Mortgages into retirement and credit impaired applicants who want to consolidate debts also require careful assessment.
Whilst the changes have been broadly welcomed, there is still an impact on lender systems and processes, particularly around the information that needs to be collected and the rules that need to be run as part of underwriting each application.
Existing affordability calculations may need to be extended to incorporate the new stress test requirements, and a careful review of the types of evidence that will be accepted going forward will be required to ensure that the new guidelines are followed.
Third-party fraud detection systems are becoming increasingly sophisticated, allowing lenders to check not just the applicant but also the security address, solicitor, broker and bank accounts linked to the case.
Lenders can use this information to determine what level of additional checks need to be carried out, for example by creating checklist items requiring documentary evidence or employer reference letters in cases where previous fraud has been associated with any participant.
Technology providers with the flexibility to adapt their solutions in the face of change are best placed to implement the enhancements required to support the new regulations quickly and with minimal impact on the business.
