Buy to Let Fact Find Supplement

THIS IS  THE PROPOSED FINAL DOCUMENT FOLLOWING DISCUSSION  

PLEASE READ THE BLOG TITLE BUY TO LET RISKS, PUBLISHED PREVIOUSLY , BEFORE LOOKING AT THIS

Supplementary Questions For BTL Properties

The following questions are for consideration when taking applications for BTL mortgages. These are intended to minimise the risk of the firm being used for fraudulent or misleading applications by clients.

NOTE: In addition to getting the client to sign this document, one thought is to send a copy on to the lender with the application form. The lender doesn't ask for such a document and may indeed not use it but, if you send it, you have advised the lender of the extent of your research and have demonstrated a certain level of due diligence. Of course there is a risk associated with this in that the lender might claim that it placed reasonable reliance upon the information.. And of course they may then uncover issues that might imply duplicity... and so the matter goes on. This thought, only occured to me as I wrote the introductory Blog to the subject, and it requires a lot more careful consideration before anyone even thinks about implementing it!!

PROPOSED QUESTIONS....

1.	Neither I/We nor any of my/our immediate family will be living in the property whilst it is in mortgage to the lender.
2.	The proposed mortgage is to be arranged on the basis that the property will be let out to tenants on a commercial basis with an approximate monthly rental income of £.......................
3.	IF A PURCHASE I/We have no prior ownership, interest or charge on the property that I  am/ we are proposing for mortgage
4.	IF A REMORTGAGE I/We  own the property and have an existing mortgage on the property which I/we am looking to replace.
5.	The purchase price of £................................ is the exact amount that I am/ we are paying  the vendor for the property and I/we have no arrangements  in place to pay a different sum to the vendor or, if appropriate, the builder nor any discounts or other incentives.
6.	FOR SINGLE OCCUPANCY BTL The property is to be let to a single tenant or family group of a size commensurate with the property’s limitations of occupancy.
7.	FOR HMOs The property is to be let to multiple tenants or family or other groups (for example students or professional persons), not exceeding ..................... and that this number is commensurate with the property’s limitations of occupancy.
8.	I/We do not have now and have never had any relationship or any other association with the vendor other than a business relationship as a purchaser. (This includes  for example, such matters as directorships of companies or any relationship as a business partner as well as vendor/purchaser/supplier relationships in respect of any goods or services either now or in the past)

SIGNED............................................................................................DATE.........................

TO BE SIGNED BY ALL APPLICANTS

IF ANY OF THESE STATEMENTS RAISE QUESTIONS THEN DETAILS MUST BE OBTAINED FROM THE CLIENT AND SET OUT BELOW AND THOSE DETAILS MUST BE SIGNED FOR AND DATED BY THEM AT THE END OF THE STATEMENT. These details should include names and addresses for possible contact and/or verification. It is suggested that one issue is recorded on a page and signed for and that where there are multiple issues, there are multiple copies of this second page, all of which must be signed and dated by all the applicants.

The client’s by signing below confirm that the statements given by them  above are accurate and true to the best of their knowledge and belief and that by signing at the foot of this page, they authorise the firm to contact the other party in order to verify these matters.

SIGNED...........................................................................................................

DATED.........................................

Buy to Let Risks

SOME OF THE RISKS ASSOCIATED WITH BUY-TO-LET MORTGAGES

On the face of it and up to now, BTLs have appeared to offer two things to mortgage brokers.

a) a good income stream in the absence of a viable first-time buyer market ( and for some of the time in the absence of any form of viable residential market).

b) a relatively compliance free sales process ( at least free from the potential constaints and possible burdens of FSA compliance)

HOWEVER, things have  been changing over the past couple of years.

It probably began in a quiet manner  several years ago, when Professional Indemnity insurers put various clauses into their proposal forms requiring firms to undertake non-regulated business on the same basis ( or whatever specific words were used) as regulated. Obviously that DIDN'T mean issuing an IDD on BTLs  - though I have seen cases where firms have done this - but it did mean exercising the same duty of care and diligence as that applied to regulated cases.

Then the phrase 'manipulation of schemes' appeared a few years ago. It was just about enough time after the market crash for mortgage fraudsters to work out the next opportunity to get mortgages by covert means. This particular issue crystalised further once the FSA had 'outlawed' self-certification of mortgages.

Of course, the standard basic level frauds of identity theft , not to mention the more complex ones involving fraudulent charges and non-existent properties have always been with us and, in all fairness, will continue to be so.

More recently, I have seen potential fraud - or at least activity to the lender that appears to be so - popping up in a number of different guises.

It doesn't really matter, in one sense, if certain actions by your clients are not actually fraudulent and are done for very good ( and legitimate) reasons. Whta does matter is what the ledner thinks about you and your firm if they find a case that , on the face of it, doesn't appear to stack up.

In order to avoid the dreaded letter for the lender - you know or can imagine the kind of thing - that basically says they don't like your business and don't want to deal with you anymore ( and by the way the FSA have also been advised), we are going to have to be more cautious about this hitherto more casual market niche.

So, what can we do?

Well one thing that we can do is to start to ask the right questions of our BTL customers. A number of cases of problem, if not necessarily fraud, that I have seen recently would have been resolved if a number of questions had been asked of the client. Admittedly,  the client could quite happily lie about the answers and that always leaves an exposure, but at least the questions would have been asked and at least the client's falsehood is documented ( and preferably signed for).

In order to take this a step further, the suggestion is to include a questionnaire for BTLs that attempts to trap any of the possible or likely risks. Such a questionnaire is set out on the following Blog. I hgave already issued it to my own clients and other associates for theri feedback and comment and I am looking to introduyce a revised version to my clients in the next week. In the meantime, any feedback would be  most welcome.

Prudential & Conduct Classifications

IMPORTANT CHANGES TO THE WAY THAT YOU WILL BE SUPERVISED

A SECOND Heads Up for Clients by David Payne, Mortgagecoply.com ltd

You may have had, or will be receiving in the near future, a letter from the FSA relating to what are termed new Prudential and new Conduct Classifications for firms that will be introduced for firms one the FCA is in place. You should have received such a letter or email by the end of March. If you have  not received such a letter by early April ( the FSA instructs) you should contact the Firms Contact Centre and advise them that you have  not received your new Prudential and Conduct Classification letter.  The  Firms’ Contact Centre telephone number is unchanged as 0845 606 9966.

Most of you should have been given a Prudential Classification of P3 and a Conduct Classification of C4 and this compliance note is aimed at those classifications. If you have received a different classification then please let me know and I will advise you on what it means for your firm.

Prudential Classification

The Prudential classification sets out how much of a risk your firm is as far as the FCA is concerned. Their approach is to focus on the impact of failure (in the firm) on consumers and the market and firms have been rated on their likely impact. A small broker firm dealing with less than a few hundred customers is going to have less impact on  both customer base and the market if , for example, it goes into liquidation or if it deliberately and persistently miss-sells a product than for example, the Northern Rock or any other lenders failing their capital adequacy ( as happened with Northern Rock for example ) or lending irresponsibly  on high income multiples without evidence of income to disadvantaged customers such e.g. RTB or adverse ( as happened pretty much across the market a few years back). We have all felt the repercussions of The Rock’s failure but who has heard about the failure of John Smith Mortgage Broker in Anytown , Somewhereshire other than friends and family and maybe some of his customers? The Rock will be a P1 – highest category of risk (probably along with most other lenders) and John Smith, if he were still trading would be a P3. (P4 is for firms that require specialist approach for example firms in insolvency or administration or firms with ‘special supervisory regimes’. These are unlikely to be any of those of you reading this document.

It is likely that the main input to this means of review for P3 firms will be the RMAR through GABRIEL, or any future returns as amended – we already know that they will be modified by 26^th April 2014 to reflect the MMR. Didn’t know that already? Watch out for future compliance updates.

The FSA states that the FCA will rely upon firms own assessment of their prudential position ( through the returns for example) and will look for inconsistency or issues arising from these ( e.g. inadequate capital resource). This sounds very much like what happens already but I am sure that it will be  ramped up a bit more. There will also be  cross-sector reviews carried out from time to time where firms will be ‘invited’ to participate (e.g. a cross-firm review of capital and liquidity.)

Conduct Classification

The Conduct classification sets out how the FCA is going to transact with you under their role as your supervisor. It is based on information that the FSA already has about your firms conduct & performance in contacts, visits, thematics , surveys and workshops to date together with RMAR and any other intelligence acquired and the number of retail customers that your firm has . (How do they know that? The lender provides data on brokers and customers on a case by case , customer by customer, basis of course.)

C1 and C2 firms will have  a dedicated supervisor – an individual at the FCA with a team (this level of supervision is referred to as a Fixed portfolio) and will be subject to review that  cycles over 1 (C1) or 2 (C2) years, respectively. I would not expect any of you to be in this category but if for any reason you have been placed in these, please let me know as a matter of urgency.

C3 firms, which should be the majority of small firms, will be subject to a 4 year cycle and will have no dedicated supervisor (this is referred to as a Flexible portfolio). The FSA have stated that they will be looking at the firm’s business model ( how it operates) and will be looking more  at firms that stand out from the crowd (‘are outliers compared to their peers’) , presumably in how they operate or in the type of markets they serve or products and provide. An obvious example under the new regime would be firms with a higher than normal level of Execution Only cases. The  cycle of review will be  on a 4-year basis but interim reviews will occur if the firm pops up on the radar, as it were.

C4 firms, and this should be  the majority of you reading this document, will also be  based on a 4-year cycle. There will be no dedicated supervisor and supervision will be  carried out by a team of sector specialists . Contact will be based on a ‘touch point’ at some time in the 4-year cycle. This may be by any of the means available to them including workshops/ roadshows, telephone interview, questionnaires & online interaction or a combination of both. Your first experience of this is the MMR Engagement programmes. If you didn’t go to the workshop / roadshow for example... Visits are not mentioned but you should not rule these out.  It will be  a lighter form of assessment than for C3 but make no mistake, there is nothing ‘light’ about your communication and interaction with your regulator. The FCA will be looking to see how firms deal with and mitigate the risks posed to their business. Firm’s that raise issues ( demonstrate sufficient risk to the FCA’s objectives) will be  subject to further intervention and of course , ultimately, enforcement let’s not forget!

Next steps

Firms are going to be moved onto the new framework on a phased basis from May to December 2013. The FCA are unclear about C4 firms but this certainly applies to C1-C3. I would imagine that although C4 is by default all the rest , and  would assume that you could move across from day 1, it is more likely that you will also have a phased move across to coincide with the scheduling of  the FCA review cycles. We will have to wait on this but I suggest that from 1^st April, as far as the FCA is concerned, you are what you have been allocated and you should act and plan accordingly.