This chapter reinforces Principle 6 by requiring a firm to take account of a customer's ability to repay before deciding to enter into, or make a further advance on, a regulated mortgage contract or home purchase plan.1 The FSAregards it as important that customers should not be exploited by firms that lend in circumstances where they are self-evidently unable to repay through income and yet have no alternative means of repayment.

1. (1)

   Examples of the circumstances where the firm may consider self-certification of income to be appropriate for the purposes of MCOB 11.3.2 R include:

   1. (a)

      where the customer is an existing customer of the firm, with an established and good payment history;

   2. (b)

      where proof of income is not readily available by virtue of the nature of the customer's employment, the basis of their remuneration, or the sources of their income; or

   3. (c)

      where the customer has a deadline for entering into the regulated mortgage contract (for example, in an auction sale) and therefore there is insufficient time for the firm to complete its usual enquiries.

2. (2)

   The examples in (1) are not exhaustive. There may be other circumstances in which a firm may consider self-certification to be appropriate. It will depend on the circumstances of each case. However, in considering whether self-certification is appropriate, a firm should have regard to its responsibilities to its customers and, in particular, should guard against taking any action that would be contrary to Principle 6 and in breach of MCOB 11.3.1 R and MCOB 11.3.2 R.

1. (1)

   In determining the written policy in accordance with MCOB 11.3.4 R(1), a firm should assume (in the absence of evidence to the contrary) that any regular payments under a regulated mortgage contract will be met from the customer's income. A firm should therefore take account of the customer's actual or reasonably anticipated income, or both, in reaching a decision on whether to enter into a regulated mortgage contract with that customer or make a further advance.

2. (2)

   Other factors that the FSA would expect to be considered by a firm in taking account of the customer's ability to repay include:

   1. (a)

      the level of both initial and subsequent repayments, where known (including, for interest-only mortgages, the cost of any associated repayment vehicle). This means, for example, that where the mortgage cost is significantly discounted for the initial period of a regulated mortgage contract, a mortgage lender should also consider the level of repayments the customer is expected to make at the end of that period, based on interest rates applicable at the time the mortgage lender is considering whether to enter into the regulated mortgage contract or make a further advance; and

   2. (b)

      whether the customer has the ability to, and intends to, repay, either wholly or partly, from resources other than income. Such resources could include the realisation of investments, or the planned sale of the mortgaged property as in the case of a regulated lifetime mortgage contract.

Where the regulated mortgage contract is an interest-only mortgage, and the firm is unable to establish the cost of the associated repayment vehicle, the repayments described in MCOB 11.3.5 G(2)(a) may be based on an equivalent repayment mortgage.

Where MCOB 11.3.5 G(2)(b) applies, the firm should be able to demonstrate the customer's intention to repay (for example, by reference to information given by the customer on an application form or to correspondence with the customer).

The record maintained in accordance with MCOB 11.3.1 R(2) should include or provide reference to matters such as:

1. (1)

   what checks, if any, the firm has carried out, regarding the customer's ability to repay; or

2. (2)

   evidence that demonstrates the customer's ability and intention to repay the loan, from resources other than income.