Mortgages: Covid-19 Payment Holidays and Repossessions

COVID-19 IMPACT

In light of the exceptional circumstances of COVID-19, the FCA published guidance for firms on 20th March and published updated guidance on 25th March.

In addition, on 25th March the EBA published a statement on consumer and payments issues in light of COVID-19 reminding firms to grant any temporary payment measures in compliance with EU law (including the Mortgage Credit Directive (2014/17/EU) and the Consumer Credit Directive (2008/48/EU)).

The FCA are clear that the guidance is potentially relevant to enforcement cases and the FCA may take it into account when considering whether a firm's conduct fell below the standard required by PRIN 6 and MCOB 2.5A.1R ('a firm must act honestly, fairly and professionally in accordance with the best interests of its customer').

In implementing the requirements firms will need to ensure call centre staff are appropriately trained on the requirements, any third party processors are acting in accordance with the requirements and that any customer communications in relation to the arrangements are clear, fair and not misleading.

SCOPE

The guidance applies to mortgage lenders, mortgage administrators, home purchase providers and home purchase administrators and applies to all types of mortgages within the FCA's remit, including second charges.

In addition the guidance applies to authorised firms carrying on activities in relation to unregulated agreements to provide credit which is secured on land (for example, investment property loans under Art 61A Financial Services and Markets Act 2000 (Regulated Activities) Order 2001). The FCA provides that an authorised firm acting in a manner inconsistent with the guidance for unregulated agreements could have an adverse effect on the firm satisfying the Threshold Conditions.

The FCA has also gone even further than this and confirmed that given the current public health emergency, it is expected that unauthorised firms which are responsible for making decisions which affect borrowers (many of which may be vulnerable ‘mortgage prisoners’), will adopt the guidance on a voluntary basis. The FCA provides that in relation to unauthorised firms who have acquired ownership of regulated mortgage contracts by way of an assignment of rights (these being firms over which the FCA has no jurisdiction) the guidance describes the standard of special skill and care which a trader may reasonably be expected to exercise towards consumers. Thereby failure by an unauthorised firm to comply with the guidance may amount to an unfair commercial practice under the Consumer Protection from Unfair Trading Regulations 2008 even if the lender in question is not regulated by the FCA.

PAYMENT HOLIDAYS

A 'payment holiday' is an arrangement under which a firm permits a customer to make no payments for a specified period of time without being in a payment shortfall.

The aim of the payment holiday is to allow lenders to provide a forbearance measure to customers. The measure is designed to help the customer from going into a payment shortfall or arrears (or further arrears if they already have a payment shortfall), where the customer is experiencing or reasonably expects to experience difficulty in paying their mortgage as a consequence of COVID-19.

The FCA has advised that it will review the guidance in the next 3 months in the light of further developments regarding COVID-19 and will if appropriate, issue amended guidance extending the period of the payment holiday, potentially for a period of up to 6 months.

The FCA has confirmed the payment holiday should be provided by firms in accordance with its guidance as follows:

Issues and Expectations

When should a firm provide a customer with a payment holiday?

Where a customer is experiencing or could reasonably expect to experience payment difficulties due to circumstances arising out of COVID-19 and wishes to receive a payment holiday, unless the firm can demonstrate it is reasonable and in the customer's interest to do otherwise.

Do firms need to proactively offer payment holidays to all customers?

No, firms do not need to be proactively offering a payment holiday to all customers.

However, firms (including their call centre staff) will need to be able to identify where, during an interaction with the firm, customers provide information suggesting that they are or could reasonably be expected to experience payment difficulties as a result circumstances relating to COVID-19. If they do provide this information then firms should proactively ask whether the customer would be interested in a payment holiday.

When would a payment holiday be appropriate?

The FCA give the example of where there is or will be a reduction in household income that can be used to make mortgage payments.

Does a firm need to investigate or confirm the customer's current circumstances before granting the payment holiday?

Firms can chose to make enquiries they consider necessary in order to judge if a payment holiday best serves the customer's interest but there is no expectation under the FCA's guidance that the firm investigates the circumstances surrounding a request for a payment holiday.

Most firms may therefore request that a customer self-certifies that their current financial difficulty is due to COVID-19.

How long should the payment holiday be for?

Where the customer is experiencing or reasonably expects to experience payment difficulties as a result of circumstances related to COVID-19 and wishes to receive a payment holiday, firms should grant a customer a payment holiday for 3 months, unless it can demonstrate it is reasonable and in the customer's best interests to do otherwise.

The FCA have said that the guidance will be reviewed in the next 3 months and they will issue amended guidance extending the period of the payment holiday, if appropriate.

Discretion is given to firms within the guidance to agree to either a payment holiday for a period shorter than 3 months or to a lower monthly payment during the payment holiday period. Examples where these measures may be appropriate include where the expected loss of income is temporary or where the loss of income is partial.

Does the firm need to assess affordability?

No, the FCA have made it clear that the requirement to assess affordability does not apply where a firm varies the terms of a regulated mortgage contract solely for the purpose of forbearance and to avoid a payment shortfall.

What happens at the end of the payment holiday?

Firms should ensure that the manner in which they seek to recover sums covered by a payment holiday and any increase in the total amount payable under the contract once the payment holiday has ended is compatible with PRIN 6.

Can firms automatically capitalise payment holiday amounts?

No, firms should not automatically capitalise missed payments during the payment holiday without giving the customer the information on the impact of doing so on their monthly payments or the term of their mortgage and giving them the option to choose an alternative means of repaying the amount (i.e. 'opt-out').

If amounts are to be capitalised it must be made clear to the customer that they could pay more over the lifetime of the mortgage as a result of capitalisation.

Can a firm implement other forbearance measures?

The guidance does not prevent firms from providing more favourable forms of assistance to the customer, such as reducing or waiving interest.

What if the customer is already in payment shortfall or arrears?

The guidance applies in respect of a customer regardless of whether they are in a payment shortfall. Where a firm is already taking or has taken steps under MCOB 13 in relation to the customer, the firm should consider whether further complementary measures to help the customer are appropriate in light of the guidance. Customers in a payment shortfall should not receive less favourable treatment than other customers.

Can firms require a customer to pay any fees or charges in connection with the payment holiday?

No, however the interest that would have been paid during the payment holiday will continue to accrue. The customer will remain liable for paying the full capital balance, and will therefore need to make up the repayments and accrued interest at some time in the future.

How will this impact credit reporting to credit reference agencies (CRAs)?

There should be no negative impact on the customer's credit file because of the payment holiday and the account of the customer should not be recorded as having any form of detrimental arrears.

What information should firms give customers on their payment holiday?

All communications should be clear, fair and not misleading.

It is really important that customers are given adequate information to understand the implications of the payment holiday, including the consequences for the total amount payable under the mortgage contract, the term and the amount of each contractual monthly instalment.

What happens at the end of the payment holiday?

Given that the grant of a payment holiday under the current guidance will be for a relatively short period, a key issue going forward for firms will be what communications they share with customers in the run up to the end of the payment holiday term. The FCA's current guidance is silent on this issue which means firms will need to closely follow future FCA updates.

Typically at the end of the payment holiday, the customer's monthly payments of interest and capital should resume, potentially with an uplift in either the overall monthly payment, or an increased number of instalments.

However, it is not currently clear what will happen at the end of the 3 months if a customer cannot resume their regular payments without experiencing further payment difficulties due to the ongoing impacts of COVID-19, and/or cannot afford to repay the amounts that accrued as a result of the payment holiday.

What are the negative impacts for customers of payment holidays?

Whilst firms will undoubtedly want to support customers during this unprecedented and difficult time, for some customers the grant of any further the payment holiday may do more harm. As the grant of a further payment holiday period may result in additional interest and/or payments being required once the term of the payment holiday ends, which could place customers under additional strain, particularly where such customers were already struggling with arrears prior to the outbreak of COVID-19.

REPOSSESSIONS

Given the unprecedented uncertainty and upheaval caused by Covid-19 and the practical limitations imposed as a result of the Government's social distancing and self-isolation measures, the FCA has also confirmed that firms should not commence or continue any repossession proceedings against customers at this time. As a result there will be a 3 month moratorium on repossessions of any residential and buy-to-let properties. Crucially, this applies irrespective of the stage that repossession proceedings have reached and applies to any step already taken in pursuit of repossession. In the event that a possession order has already been obtained, the FCA's clear guidance is that firms should refrain from enforcing it.

If you would like to know more or would like to discuss anything further, please get in touch.