Financial Institutions to Implement Tougher Lending Rules

Banks and credit card companies will be enforcing new lending regulations to its customers anytime soon. This action was urged after the Financial Services Authority watchdog (FSA) conducted a thorough review of lenders' behavior towards consumers. FSA is currently advising financial institutions, like banks and lending companies, to impose these pro-consumer rules and ensure that they only provide financial aid to those who can afford repayments.

The government wants to protect consumers or clients by implementing tougher rules. It vows to put an end to "reckless banking" and make these financial institutions liable for loans, once it is proven that they failed to check the financial background or capability of possible borrowers.

Up until today, credit or financial institutions continue to provide monetary assistance to consumers on the basis that a borrower or consumer rather than an institution would take on the risk. This situation made the government want to see the "onus of the responsibility reversed."

FSA will make and implement this rule, as well as other recommendations, official policy when it publishes the Mortgage Market Review this Monday. This new policy is expected to secure self-certified mortgage companies who offer loans and credit cards on consumers without having been requested to do so. Moreover, it is expected to stop short of setting caps on loan-to-value ratios and income multiples offered to borrowers.

Michael Coogan, director general of the Council of Mortgage Lenders, said in a Downing Street webcast that although the mortgage market has fixed many of its problems, it is still not performing effectively. He believes financial institutions should never encourage consumers or clients to borrow more than what they can afford to pay. These lenders should conduct proper checks on the incomes of their prospects before approving loan applications.

To protect homebuyers, banks and credit card companies need tougher regulations to ensure that high loan-to-value or loan-to-income mortgages will be offered only after rigorous checks.

Robert Sinclair, the director of the Association of Mortgage Intermediaries, said that rules must be imposed to protect consumers from unaffordable debts.

The Council of Mortgage Lenders, however, warned against the introduction of too many new rules though many companies have already responded to changed market conditions.

Financial Services Authority is presently facing challenges and pitfalls in pushing for this action too quickly. Director-general Coogan, in fact, revealed that the biggest challenge they have is resisting external pressure to carry out these measures at a time when the mortgage market is trying to fix its problems, but still not functioning effectively.

Doug Nicholas

Doug Nicholas, a financial consultant by profession with a Masters degree in International Business from Brown University, is also an ardent writer. Though he has a full time job at one of the companies listed on Wall Street, he does manage to squeeze in time to follow his passion. He puts his ideas to words in his articles related to finance and business.