The line between fast-track and self-certification has always been blurred. But recently the division has been even more difficult to define with the Financial Services Authority (FSA) saying that fast-track is a type of self-cert mortgage but brokers maintaining that the two are completely different products.
As most people understand it, fast-track offers clients prime rates without the need to provide proof of income. Lenders reserve the right to see evidence of the client’s income at any time, and will refuse the application if it does not prove what they are claiming.
Self-cert mortgages, on the other hand, should be used when the client does not have evidence to prove their income, so is self-certifying it. Rates of interest are higher on such loans because of this added risk.
However the Mortgage Introducer post bag is full of letters from intermediaries accusing their peers of using fast-track as a way for brokers to submit self-cert cases. If this is the case, both lenders and brokers could be said to be in the wrong; lenders for accepting self-cert cases as fast-track, and brokers for submitting cases as fast-track when, should the client be asked to produce proof of income, they would not be able to.
Essentially – if, indeed, this is happening – by putting self-cert cases through as fast-track, brokers are taking a gamble. On one hand, fast-track is good for the customer because if they do qualify, they will end up paying prime rates. But the risk is that lenders can carry out spot checks on fast-track applications to make sure it is not being abused. Can the customer prove their income if their case is selected to be checked? “If not, you’re in a pickle,” says Neil Walkling, head of compliance at Sesame. “The lender will probably turn down the case and in a house buying chain this could lead to delays – or the chain collapsing. So the question is, is the customer aware of this risk and is it one they are happy to take?”
Experiencing a downturn
Broker Danny Lovey, of The Mortgage Practitioner, reckons that misuse of the fast-track system is why some lenders are reporting a downturn in their self-cert business.
“Here lies the rub – far too many lenders in the prime market are going for market share and are encouraging brokers to fast-track, and if they pass the credit score, no more questions are asked,” he says. “The thing is, fast-track is for when a broker can prove the income if needed. Self- cert is when you cannot.”
Lovey believes the FSA ‘does not have the issue on its radar’ and suggests the regulator has a possible lack of understanding of the self-cert market. He explains: “The whole thing is a mess at the moment and the prime lenders who do fast-track know exactly what is happening and now have builders, taxi drivers, and all the other areas as fast-track. I know it is happening and I want to see a level playing field.”
A vague area
Lovey could be right when he says the FSA is not too concerned about the distinction between fast-track and self-cert. Although the FSA is currently doing some thematic work on self-cert, it is still vague about what constitutes self-cert.
“When a mortgage is fast-tracked you don’t ask for proof of income, but you could,” says FSA spokeperson Robin Gordon-Walker. “It can be another way of saying self-cert, but fast-track should just mean it goes through quicker. If we found brokers weren’t doing it right, we would give them a chance to correct things by issuing a notice to improve. We’re ready to help people needing clarification on the self-cert definition.”
Most brokers note that fast-track is intended as a way for lenders to speed up transactions with customers who appear to be a low risk, perhaps because they are taking out a mortgage with a low loan-to-value ratio or because they pass the credit check with flying colours.
Confusing matters
So, what do lenders say? Without a doubt some are confusing matters by offering fast-track deals but guaranteeing that no paperwork will be required. Northern Rock, for example, offers a ‘residential fast-track guarantee’ which maintains that the lender will not ask for any additional documents to verify the applicant’s income, providing the case meets certain criteria, following submission of the application. However it does not offer the guarantee to first-time buyers, ‘Together’ customers or those borrowing over 85 per cent loan-to-value – 80 per cent if the loan is for £1,000,000 or more.
But if you ask Northern Rock whether this is essentially a self-cert deal, it says it distinguishes these products from true self-certified mortgages on sourcing systems by clearly naming them ‘fast-track’ in the lender or product title on Trigold. “In addition, there are important on-screen system notes that a broker should read before selling a particular product,” says John Watson, operational director at Northern Rock. “These clearly draw attention to the fact that we always reserve the right to seek further information. There should be no confusion regarding Northern Rock’s requirements for the fast-track service.”
Tim Anson, head of residential lending at Mortgage Express, says the issue of brokers processing true self-cert cases as fast-track mortgages is a clear point of concern.
“While a fast-track mortgage can be submitted without documentary proof of income, this is on the basis that the income declared on the application is accurate and the broker is able to support this with evidence if required to by the lender – a requirement that clearly differentiates fast-track from self-cert,” he says. “Boundaries between fast-track and self-cert may have become increasingly blurred but there remains a clear need for self-cert in today’s mortgage market. With a growing self-employed market and bonuses accounting for an increased proportion of average earnings across the UK labour force, a self-cert mortgage is the only way for many people to fulfil their dream of home ownership.”
Looking at the market
Datamonitor says that currently around 55 per cent of self-cert customers are self-employed workers. In addition to this, it says that a further 34 per cent of the sector is made up of contract workers, agency staff and seasonal workers. In total that means that 89 per cent of the self-cert market – almost nine out of 10 borrowers – are people that fall outside of traditional employed status because of their working patterns or variable incomes.
In addition to the self-employed and contract workers, employment patterns are a major factor in another group of self-cert borrowers, those people that work more than one job. This is often known as portfolio working, which sounds very sophisticated, yet often many workers in this group are holding down two, three or more jobs just to earn a decent income. “Some of those jobs could be part-time or casual, such as the person who finishes his day job and then pulls a night shift driving a taxi, so proof of income can be difficult,” says Alex Hammond, PR manager at Kensington Mortgages. “Other typical self-cert borrowers include people on low basic salaries, but who regularly earn large bonuses; directors who wish to keep their financial affairs private from their fellow directors; and high net worth individuals with complicated income streams.”
On that evidence alone the vast majority of self-cert borrowers are not trying to buck the system, but are actually normal people with somewhat out-of-the-norm working practices or income streams. It is estimated that the self-employed and borrowers with non-standard working patterns alone account for almost half of all the customers in the specialist lending sector, which itself makes up more than 20 per cent of the entire UK mortgage market.
According to David Hollingworth, head of communications at London & Country, from the broker point of view fast-track and self-cert should be viewed completely separately, as they are not designed to do the same job. “Those brokers blurring the edges will find themselves getting into difficulties when asked for further supporting information. It will also lead to suspicion that some are using fast-track to inflate income in the same way which has blighted self-cert. This type of misuse is fraud and needs to be stamped out,” says Hollingworth.
If brokers have suspicions that rival brokers are putting cases through as fast track when they should be self-cert, they can report them to the FSA. The regulator has a special mortgage helpline where brokers and the public can report any fraudulent activity.
FSA reviews
When the FSA last reviewed the self-cert market in 2005, the distinction between fast-track and self-cert was not one of the issues raised. Its findings mainly related to cases where the client’s income was exaggerated in order to obtain a bigger loan which, essentially, is fraud.
A mystery shopping exercise indicated that, of the 41 firms contacted, three firms were prepared to discuss with customers the possibility of overstating their incomes to obtain a larger mortgage. However the FSA said the problem was neither widespread nor systematic. Another issue that arose was whether a customer’s suitability for a particular product was adequately assessed. Where proof of income was available, some advisers generally failed to record why a self-certification mortgage was recommended rather than a cheaper full-status mortgage. Affordability was another issue; 47 per cent of the files reviewed did not adequately demonstrate the intermediary had appropriately assessed affordability.
MI reported last week that some networks are putting pressure on appointed representatives not to do self-cert due to ongoing concerns about the sector. One industry source said that networks were ‘scared stiff’ of self-cert and that business levels were declining.
But Walkling says the distinction between fast-track and self-cert is not the issue causing networks problems.
“In its last investigation, the FSA found that it’s not always evident why the customer was advised to go self-cert and we think the reason is that some self-cert customers are fiddling the tax man and have one set of accounts for tax purposes and another for getting a mortgage. If an adviser suspects a client is defrauding the Inland Revenue, he should report them. Also the obvious issue is using self-cert to exaggerate your income. Clients often say they have two or three sources of income when in reality they have one low paying job. Advisers shouldn’t encourage this and should check for income on bank statements.”
Weakness
One potential weakness in the system is that lenders do not all stipulate that brokers cannot submit a fast-track case unless they could prove income if asked. Technically, therefore, in the endeavour to provide the best product for their clients, fast-track is used as lenders are happy to underwrite clients that they see as low risk in this way.
“This is a misuse of lender-broker trust and it is up to individual broker firms to police this at present because, while often an unwritten rule, a lender would consider it deception to submit a fast-track case to a lender where the income could not be proven on demand”, says Katie Tucker, product specialist at John Charcol. “Fast-track is not self-cert: Fast-tracking is available on the understanding that references can be asked for if the lenders wishes. Self-cert comes with the guarantee that references will not be asked for.”
Tucker says she would welcome definition of this from the FSA, including definitions on the disadvantages to the client pre-sale because the ‘Treating Customers Fairly’ principle can be used to argue both sides. Should customers have more protection or a cheaper product?
Essentially the FSA would not be concerned about genuine self-cert applications because where genuine income is declared, multiples and affordability measures are applied when working out responsible lending limits. “What concerns the FSA is the self-cert business that is open to fraudulent income declarations, as this leads to higher lending that can not be afforded by the applicant,” says Tucker. “The FSA does not exercise the same constraints for fast-track. The FSA could either monitor fast-track applications by enforcing the lenders’ regular spot checks or it could instruct lenders to specify that fast-track applications should not be submitted if income cannot be proved.”
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