MCOB 11.6 1Responsible lending and financing

1. (1)

   Except as provided in MCOB 11.6.3 R, MCOB 11.6.57 R (Interest roll-up mortgages) and MCOB 11.7 (Transitional arrangements):

   1. (a)

      before entering into, or agreeing to vary, a regulated mortgage contract or home purchase plan, a firm must assess whether the customer (and any guarantor of the customer's obligations under the regulated mortgage contract or home purchase plan) will be able to pay the sums due; and

   1. (b)

      the firm must not enter into the transaction in (a) unless it can demonstrate that the new or varied regulated mortgage contract or home purchase plan is affordable for the customer (and any guarantor).

2. (2)

   In MCOB 11.6, references to payment of sums due means:

   1. (a)

      in the case of a regulated mortgage contract, the making of the payments to repay the sums advanced and interest reasonably expected to be accrued under the regulated mortgage contract; and

   1. (b)

      in the case of a home purchase plan, the payment of sums due under the home purchase plan;

   in each case as they fall due.

3. (3)

   In MCOB 11.6, references to the customer must be read as referring also to any guarantor of the customer's obligations under the regulated mortgage contract, where the context permits.

1. (1)

   MCOB 11.6.2 R does not apply to:

   1. (a)

      entering into a new regulated mortgage contract or home purchase plan as a replacement for an existing regulated mortgage contract or home purchase plan between the customer and the firm (either as the original mortgage lender or home purchase provider or as the transferee of the existing contract), whether or not the new contract relates to the same property; or

   2. (b)

      a variation of an existing regulated mortgage contract or home purchase plan;

   provided the conditions in (2) are satisfied.

2. (2)

   The conditions referred to in (1) are that:

   1. (a)

      the proposed new or varied regulated mortgage contract or home purchase plan would not involve the customer taking on additional borrowing or (for a home purchase plan, increasing the amount of finance provided under the plan) beyond the amount currently outstanding under the existing regulated mortgage contract or home purchase plan, other than to finance any product fee or arrangement fee for the proposed new or varied contract; and

   2. (b)

      there is no change to the terms of the regulated mortgage contract or home purchase plan which is likely to be material to affordability.

3. (3)

   MCOB 11.6.2 R does not apply to a variation to the terms of a regulated mortgage contract or home purchase plan which is made solely for the purposes of forbearance where the customer has a payment shortfall, or in order to avoid a payment shortfall.

When assessing for the purposes of MCOB 11.6.2 R whether a customer will be able to pay the sums due, a firm:

1. (1)

   must not base its assessment of affordability on the equity in the property which is used as security under the regulated mortgage contract or is subject to the home purchase plan, or take account of an expected increase in property prices;

1. (2)

   must take full account of:

   1. (a)

      the income of the customer, net of income tax and national insurance; and, as a minimum

   2. (b)
      1. (i)

         the customer's committed expenditure; and

      2. (ii)

         the basic essential expenditure and basic quality-of-living costs of the customer's household;

1. (3)

   (if it is a mortgage lender) must assess affordability on the basis of both repayment of capital and payment of interest over the term, except where lending under an interest-only mortgage in accordance with MCOB 11.6.41R (1); and

2. (4)

   (if it is a mortgage lender) must take account of the impact of likely future interest rate increases on affordability, as set out in MCOB 11.6.18 R.

For the purposes of MCOB 11.6.2 R, a firm must not rely on a general declaration of affordability by the customer or his representative.

In taking account of the customer's income (in accordance with MCOB 11.6.5R (2)(a)) for the purposes of its assessment of whether the customer will be able to pay the sums due:

1. (1)

   a firm must obtain evidence of the income declared by the customer for the purposes of the customer's application for the regulated mortgage contract or home purchase plan (or variation). The evidence, whether document-based or derived through the use of automated systems, must be of a type and for a period which is adequate to support each element of income that the firm is taking into account, and subject to appropriate anti-fraud controls; and

2. (2)

   a firm must not accept self-certification of income by the customer, and the source of the evidence in (1) must be independent of the customer.

For the purposes of a mortgage lender's or home purchase provider's assessment of whether the customer will be able to pay the sums due:

1. (1)

   the committed expenditure of a customer in MCOB 11.6.5R (2)(b)(i) is his credit and other contractual commitments which will continue after the regulated mortgage contract or home purchase plan (or variation) is entered into;

2. (2)

   the basic essential expenditure of a customer's household in MCOB 11.6.5R (2)(b)(ii) comprises expenditure for: housekeeping (food and washing); gas, electricity and other heating; water; telephone; council tax; buildings insurance; ground rent and service charge for leasehold properties; and essential travel (including to work or school); and

3. (3)

   the basic quality-of-living costs of a customer's household in MCOB 11.6.5R (2)(b)(ii) are its expenditure which is hard to reduce and gives a basic quality of life (beyond the absolute essential expenditure in (2)).

For the purposes of its assessment of whether the customer will be able to pay the sums due:

1. (1)

   a firm may generally rely on any evidence of income or information on expenditure provided by the customer unless, taking a common sense view, it has reason to doubt the evidence or information;

2. (2)

   in taking account of the customer's committed expenditure, a firm must take reasonable steps to obtain details of the customer's actual outstanding commitments; and

3. (3)

   in taking account of the basic essential expenditure and basic quality-of-living costs of a customer's household, a firm may obtain details of the actual expenditure. Alternatively, it may use statistical data or other modelled data appropriate to the composition of the customer's household, including the customer, dependent children and other dependents living in the household. If it uses statistical or other modelled data a firm must apply realistic assumptions to determine the level of expenditure of the customer's household.

If a firm is, or should reasonably be aware from information obtained during the application process, that there will, or are likely to, be future changes to the income and expenditure of the customer during the term of the regulated mortgage contract or home purchase plan, the firm must take them into account when assessing whether the customer will be able to pay the sums due for the purposes of MCOB 11.6.2 R.

1. (1)

   This rule applies where:

   1. (a)

      a purpose of a regulated mortgage contract or home purchase plan (or variation) is debt consolidation; and

   2. (b)

      the customer is a credit-impaired customer.

2. (2)

   Subject to (3), where each of the conditions in (1) is satisfied and, if the debts which are to be repaid using the sums raised by the regulated mortgage contract or home purchase plan (or variation) were not repaid, the transaction would not be affordable for the customer, the firm must take reasonable steps to ensure that, on completion of the transaction, those debts are actually repaid.

3. (3)

   The requirement in (2) does not apply if the firm has assumed that the customer's existing debts which are to be repaid using the sums raised by the regulated mortgage contract or home purchase plan (or variation) will not in fact be repaid and, accordingly, include them as committed expenditure in the affordability assessment for the customer.

1. (1)

   Under MCOB 11.6.5R (4), in taking account of likely future interest rate increases for the purposes of its assessment of whether the customer will be able to pay the sums due, a mortgage lender must consider the likely future interest rates over a minimum period of five years from the expected start of the term of the regulated mortgage contract (or variation), unless the interest rate under the regulated mortgage contract is fixed for a period of five years or more from that time, or for the duration of the regulated mortgage contract (or variation), if less than five years.

2. (2)

   A mortgage lender must be able to justify the basis it uses for determining likely future interest rates for the purposes of this rule by reference to market expectations.

3. (3)

   For the purposes of this rule, even if the basis used by the mortgage lender in (2) indicates that interest rates are likely to fall, or to rise by less than 1%, during the first five years of the regulated mortgage contract (or variation), a mortgage lender must assume that interest rates will rise by a minimum of 1% over that period.

A firm must put in place, and operate in accordance with, a written policy (which may be contained in more than one document), approved by its governing body, setting out the factors it will take into account in assessing a customer's ability to pay the sums due. The policy must address the following matters:

1. (1)

   how income and expenditure is to be assessed, including (except as provided in MCOB 11.6.32R (1) and MCOB 11.6.39R (1)):

   1. (a)

      details of the types of income which are acceptable;

   2. (b)

      the proportion of different income streams which is acceptable;

   3. (c)

      how variations in income over time, of which the firm is aware, are to be considered;

   4. (d)

      what is acceptable evidence of income (including the time period to be covered by the evidence); and

   5. (e)

      how committed expenditure, basic essential expenditure and basic quality-of-living costs are taken into account when assessing affordability;

2. (2)

   how future interest rates are taken into account when assessing affordability;

3. (3)

   the calculations used to determine whether the regulated mortgage contract or home purchase plan is affordable;

4. (4)

   how the mortgage lender's or home purchase provider's anti-fraud controls are incorporated into affordability assessments;

5. (5)

   how the mortgage lender's or home purchase provider's method of calculating the size of the advance for each customer, based on a consideration of the customer’s income and expenditure, is to be monitored, including the timing of reviews and key performance indicators to be used (see MCOB 11.6.22 R (Monitoring));

6. (6)

   the actions to be taken if the mortgage lender's or home purchase provider's calculation method, referred to in (5), does not perform as expected;

7. (7)

   how regular audits of compliance with the mortgage lender's or home purchase provider's responsible lending or financing policy established in accordance with this rule are to be undertaken (as required by MCOB 11.6.24 R);

8. (8)

   how the record keeping requirements in MCOB 11.6.60 R are to be met;

9. (9)

   (if applicable) the matters required by MCOB 11.6.50 R (Interest-only policy); and

10. (10)

    (if applicable) how the firm will apply the rules in MCOB 11.7 (Transitional arrangements) so as to permit exceptions to its procedures for affordability assessments, to include arrangements for use of management information to monitor its application of those exceptions.

A firm must put in place, and be able to demonstrate that it has, robust systems and controls (including the use of management information and key performance indicators) to monitor the effectiveness of its affordability assessments, including in preventing payment difficulties.

A firm must ensure that its compliance with the responsible lending or financing policy required by MCOB 11.6.20 R is reviewed at least once per calendar year:

1. (1)

   in any case where the firm has an internal audit function or outsourced equivalent, by that function; and

2. (2)

   in any other case, by the firm's internal compliance function or an outsourced equivalent.

Where a regulated mortgage contract is solely for a business purpose, a firm may opt to apply MCOB 11.6.26 R to MCOB 11.6.31 R in place of MCOB 11.6.5 R to MCOB 11.6.19 G.

When assessing for the purposes of MCOB 11.6.2 R whether a customer will be able to pay the sums due, a firm:

1. (1)

   must not base its assessment of affordability on the equity in the property which is used as security under the regulated mortgage contract, or take account of an expected increase in property prices;

2. (2)

   must:

   1. (a)

      where the repayments will be made from the resources of the customer:

      1. (i)

         take full account of the income, net of income tax and national insurance, or net assets (or both) of the customer; and the customer’s committed expenditure; and

      2. (ii)

         take account, in general terms as a minimum, of the basic essential expenditure and basic quality-of-living costs of the customer’s household; and

   2. (b)

      where the repayments will be made from the financial resources of the business, take full account of the strength of those resources;

3. (3)

   in a case falling within (2)(b), if the customer is relying on the business for his personal income, must as a minimum consider in general terms whether the business can support the customer's basic essential expenditure and basic quality-of-living costs;

4. (4)

   must assess affordability on the basis of both repayment of capital and payment of interest over the term, except where lending under an interest-only mortgage in accordance with MCOB 11.6.41R (1); and

5. (5)

   must take account of the impact of likely future interest rate increases on affordability.

For the purposes of MCOB 11.6.2 R, a firm must not rely on a general declaration of affordability by the customer or his representative.

In taking account (in accordance with MCOB 11.6.26R (2)) of the customer's income or net assets (or both) and the resources of the business for the purposes of its assessment of whether the customer will be able to pay the sums due:

1. (1)

   a firm must obtain evidence of the income or net assets (or both) of the customer and the resources of the business, as declared by the customer for the purpose of the customer's application for the regulated mortgage contract (or variation); and

2. (2)

   a firm must not accept self-certification of income by the customer, and the source of the evidence in (1) must be independent of the customer.

In MCOB 11.6.26 R, for the purposes of taking full account of committed expenditure and taking account in general terms of basic essential expenditure and basic quality-of-living costs, the meaning of those phrases is as set out in MCOB 11.6.10 R.

If a firm is, or should reasonably be aware from information obtained during the application process, that there will, or are likely to, be future changes to the income and expenditure of the customer, or the resources of the business, during the term of the regulated mortgage contract, the firm must take them into account when assessing whether the customer will be able to pay the sums due for the purposes of MCOB 11.6.2 R.

Where a firm chooses, in accordance with MCOB 11.6.25 R, to apply the provisions of MCOB 11.6.26 R to MCOB 11.6.31 R in place of MCOB 11.6.5 R to MCOB 11.6.19 G:

1. (1)

   its policy in MCOB 11.6.20R (1) need not address each of the matters prescribed in sub-paragraphs (a) to (e) of that rule;

2. (2)

   MCOB 11.6.23 G does not apply; and

3. (3)

   in each case the record-keeping requirements in MCOB 11.6.60R (2)(a) to (d) apply only to the extent relevant, but the record in MCOB 11.6.60R (1) must also include, to the extent relevant:

   1. (a)

      the customer's assets and the evidence relied on to assess them; and

   2. (b)

      the details considered in relation to the resources of the business.

Where a regulated mortgage contract is for a high net worth mortgage customer, a firm may opt to apply MCOB 11.6.34 R to MCOB 11.6.38 R in place of MCOB 11.6.5 R to MCOB 11.6.19 G.

When assessing for the purposes of MCOB 11.6.2 R whether a customer will be able to pay the sums due, a firm:

1. (1)

   must not base its assessment of affordability on the equity in the property which is used as security under the regulated mortgage contract, or take account of an expected increase in property prices;

1. (2)

   must:

   1. (a)

      take full account of the income, net of income tax and national insurance, or net assets (or both) of the customer; and the customer's committed expenditure; and

   2. (b)

      take account, in general terms as a minimum, of the basic essential expenditure and basic quality-of-living costs of the customer's household;

1. (3)

   must assess affordability on the basis of both repayment of capital and payment of interest over the term, except where lending under an interest-only mortgage in accordance with MCOB 11.6.41R (1); and

2. (4)

   must take account of the impact of likely future interest rate increases on affordability.

For the purposes of MCOB 11.6.2 R, a firm must not rely on a general declaration of affordability by the customer or his representative.

In taking account of the customer's income or net assets (or both) (in accordance with MCOB 11.6.34R (2)(a)) for the purposes of its assessment of whether the customer will be able to pay the sums due:

1. (1)

   a firm must obtain evidence of the income or net assets (or both) declared by the customer for the purpose of the customer's application for the regulated mortgage contract (or variation); and

2. (2)

   a firm must not accept self-certification of income by the customer, and the source of the evidence in (1) must be independent of the customer.

In MCOB 11.6.34 R, for the purposes of taking full account of committed expenditure and taking account in general terms of basic essential expenditure and basic quality-of-living costs, the meaning of those phrases is as set out in MCOB 11.6.10 R.

If a firm is, or should reasonably be, aware from information obtained during the application process, that there will, or are likely to, be future changes to the income and expenditure of the customer during the term of the regulated mortgage contract, the firm must take them into account when assessing whether the customer will be able to pay the sums due for the purposes of MCOB 11.6.2 R.

Where a firm chooses, in accordance with MCOB 11.6.33 R, to apply the provisions of MCOB 11.6.34 R to MCOB 11.6.38 R in place of MCOB 11.6.5 R to MCOB 11.6.19 G:

1. (1)

   its policy in MCOB 11.6.20R (1) need not address each of the matters prescribed in sub-paragraphs (a) to (e) of that rule;

2. (2)

   MCOB 11.6.23 G does not apply; and

3. (3)

   in each case the record-keeping requirements in MCOB 11.6.60R (2)(a) to MCOB 11.6.60R (2)(d) apply only to the extent relevant, but the record in MCOB 11.6.60R (1) must also include, to the extent relevant, the customer's assets and the evidence relied on to assess them.

1. (1)

   A mortgage lender may only enter into an interest-only mortgage, or switch a repayment mortgage onto an interest-only basis for all or part of its term, if:

   1. (a)

      it has evidence that the customer will have in place a clearly understood and credible repayment strategy; and

   2. (b)

      as far as it is reasonably able to assess at that time, the repayment strategy has the potential to repay the capital borrowed and any interest reasonably expected to be accrued under the interest-only mortgage.

2. (2)

   In MCOB 11.6, a reference to an interest-only mortgage is to be read as including any regulated mortgage contract which includes an interest-only period or where part of the sum is advanced on an interest-only basis.

3. (3)

   A mortgage lender must not accept speculative repayment strategies for the purposes of (1).

MCOB 11.6.41R (1) does not prevent a mortgage lender, when appropriate, from making a temporary concession, by which he accepts payment of interest only, with a customer who is in arrears or has a payment shortfall, or is at risk of arrears or a payment shortfall, on a regulated mortgage contract.

For the purposes of MCOB 11.6.2 R, where a mortgage lender is lending under an interest-only mortgage in accordance with MCOB 11.6.41R (1), it may assess affordability on the basis of payment of interest only over the term (plus repayment of such capital as may be due to be repaid over the term). If it does so, it must consider as part of the customer's committed expenditure under MCOB 11.6.5R (2)(b)(i) (or the equivalent alternative provision for transactions with high net worth mortgage customers or solely for business purposes) the cost to the customer of the repayment strategy.

1. (1)

   This rule applies in relation to all interest-only mortgages which a mortgage lender enters into on or after 26 April 2014 except:

   1. (a)

      lifetime mortgage;

   2. (b)

      bridging loans; and

   3. (c)

      any other case where the repayment of capital borrowed and, if applicable, interest accrued, is certain.

2. (2)

   Except as set out in (3), a mortgage lender must carry out a review (as a minimum, once) during the term of the mortgage, in which contact is made with the customer, to check that the customer's repayment strategy is still in place, and that it is still reasonable to expect that the repayment strategy has the potential to repay the capital borrowed and, where applicable, pay the interest reasonably expected to be accrued under the interest-only mortgage. The review must be carried out at a stage of the term when, if the repayment strategy is not in place, or not adequate, there is likely to be sufficient time prior to the end of the term for the customer to take appropriate steps to remedy the situation.

3. (3)

   The review in (2) is not required in any case where, despite reasonable efforts to contact the customer, the mortgage lender has been unable to do so.

4. (4)

   Following the review in (1), where appropriate the mortgage lender must take reasonable steps to discuss with the customer what may be done to address the situation.

A mortgage lender which enters into interest-only mortgages (unless they are only lifetime mortgages) must include in the policy which is required by MCOB 11.6.20 R (Responsible lending and financing policy) a policy on interest-only mortgages, setting out its processes and procedures for ensuring compliance with MCOB 11.6.41R (1) and for safeguarding the interests of customers during the term of interest-only mortgages. This policy must include:

1. (1)

   details of the mortgage lender's plans for lending by way of interest-only mortgages, including its planned volumes of lending on that basis over a specified period, and provision for reviewing the actual volumes of lending on that basis, including the timing and method of review;

2. (2)

   specification of the types of repayment strategy which will be considered acceptable, and the evidential requirements and other controls which will be applied to ensure that only such types will be accepted, including the controls to be applied where the repayment strategy is the sale of the property which is the subject of the regulated mortgage contract;

3. (3)

   the procedures for checking the existence and adequacy of the repayment strategy in line with the policy, including questions to be asked of the customer;

4. (4)

   the arrangements for monitoring and auditing compliance with the policy, processes and procedures (see MCOB 11.6.22 R and MCOB 11.6.24 R (Monitoring)); and

5. (5)

   the process for the review required by MCOB 11.6.49 R which, as a minimum:

   1. (a)

      prescribes the timing of the review;

   2. (b)

      prescribes the content of the review, including the questions to be asked of the customer and the actions to be taken if the customer proves difficult to contact or otherwise does not co-operate with the review;

   3. (c)

      sets out how it is to be decided whether the customer’s repayment strategy meets the criteria in MCOB 11.6.49R (2); and

   4. (d)

      sets out the actions which will be appropriate to be considered during the discussions in MCOB 11.6.49R (2), depending on the circumstances of the customer.

Except in relation to a secured overdraft which is solely for a business purpose or is with a high net worth mortgage customer:

1. (1)

   when considering extending the term of a bridging loan, a mortgage lender must comply with MCOB 11.6.2 R as if the bridging loan were a new loan;

2. (2)

   where MCOB 11.6.2 R does not apply in relation to extending the term of a bridging loan (because the bridging loan is an interest roll-up mortgage, and therefore MCOB 11.6.57 R applies), the mortgage lender must consider with the customer, before he commits himself to extend the term, the impact of the extension on the customer's remaining equity in the property which is the subject of the bridging loan; and

3. (3)

   a firm must not agree to extend the term of a bridging loan unless the customer has made a positive choice to do so.

The requirements in MCOB 11.6.2 R (and any Handbook provisions applicable only to that rule) do not apply in relation to an interest roll-up mortgage.

A mortgage lender may not enter into an interest roll-up mortgage, or vary an existing regulated mortgage contract so that it becomes an interest roll-up mortgage, unless it is:

1. (1)

   a lifetime mortgage; or

2. (2)

   a bridging loan; or

3. (3)

   a loan to a high net worth mortgage customer; or

4. (4)

   a loan solely for business purposes.

1. (1)

   A firm must make, in paper or electronic form, an adequate record of the steps it takes to comply with the rules in this chapter in relation to each customer.

2. (2)

   The record in (1) must include the information taken into account in each affordability assessment, so that it is possible to understand from the record the basis of the mortgage lender's or home purchase provider's lending or financing decision, including (except as provided in MCOB 11.6.32R (3) and MCOB 11.6.39R (3)):

   1. (a)

      the customer's income, including, where relevant, a breakdown of the different income types;

   2. (b)

      the customer's committed expenditure;

   3. (c)

      the basic essential expenditure and basic quality-of-living costs of the customer's household (whether actual expenditure for that household or assumed expenditure from statistical or other modelled data, including information to show why the assumed data is appropriate to that customer's household);

   4. (d)

      the evidence relied on to assess income and expenditure;

   5. (e)

      the rate or assumptions used to test affordability against likely future interest rate rises;

   6. (f)

      the repayment type and term of the regulated mortgage contract, or the term of the home purchase plan; and

   7. (g)

      the calculation used to determine whether the regulated mortgage contract, home purchase plan is (or, where applicable, following the variation, remains) affordable for the customer.

3. (3)

   In relation to interest-only mortgages, the record in (1) must include:

   1. (a)

      the reasons for each decision to offer an interest-only mortgage to a customer;

   2. (b)

      the evidence of the customer's repayment strategy and, where applicable, its cost;

   3. (c)

      details of the firm's attempts to contact the customer where required by MCOB 11.6.49 R; and

   4. (d)

      the outcome of each review required by MCOB 11.6.49 R (whether conducted once during the term of the interest-only mortgage or more frequently).

4. (4)

   In relation to the extension of the term of a bridging loan which falls within MCOB 11.6.55 R, the record in (1) must include:

   1. (a)

      the customer's positive choice to extend the term;

   2. (b)

      the reasons for the decision to extend the term; and

   3. (c)

      the evidence of the customer's repayment strategy and its cost.

5. (5)

   A firm must retain the records required by (1) to (4) for the term of the regulated mortgage contract or home purchase plan.

6. (6)

   Where a firm enters into or varies a regulated mortgage contract or home purchase plan under MCOB 11.7 (Transitional arrangements), it must keep, for the term of the contract or plan, a record of:

   1. (a)

      the outstanding balance on the existing contract or plan;

   2. (b)

      the cost of the repairs or maintenance work to the property, where relevant;

   3. (c)

      any product fee or arrangement fee financed by any additional borrowing taken on under the contract or increase in the amount of finance provided under the plan; and

   4. (d)

      the rationale for each decision made to enter into or vary a regulated mortgage contract or home purchase plan under MCOB 11.7 (Transitional arrangements), including why the firm considered it to be in the customer's best interests.

7. (7)

   A firm must make, and keep up to date, an adequate record of the policy required by MCOB 11.6.20 R. When the policy is changed, a record of the previous policy must be retained for so long as any regulated mortgage contract or home purchase plan to which it was applicable remains outstanding.