In its paper, Embedding the Mortgage Market Review: Responsible Lending Review, the FCA gave examples of instances where lenders were failing to assess income effectively.
In one example, lenders appeared to have difficulty separating different types of variable income, such as shift allowances and overtime, from guaranteed income in order to verify it in line with their policy.
Tasked with the challenge of knowing all lenders’ complex income policies, brokers are best placed to stand back from the pages of small print on bonuses, benefits and SA302s to suggest ways in which policies could be simplified – or, indeed, if they should be.
This week’s panel of experts give their views on how complex income is assessed, how it can be improved, and which lenders are getting it right.
Islay Robinson, CEO of Enness Private Clients, says lenders must train up and trust their underwriters to assess complex income rather than providing long-winded process charts, devoid of meaning, to their staff.
Debbie Bell, financial services director at Kings Group, says a good adviser is armed with sufficient knowledge of lenders’ income criteria to guide their complex clients through the application process, even if the lender is found lacking.
Brian Murphy, head of lending at Mortgage Advice Bureau, says complex income calculations need to remain complex so the lender can be sure its decisions are sound.
Affordability assessments are now more stringent than ever, and the documents required to support an application are becoming more extensive. Banks don’t need to ask for this extra documentation – it is a result of failings in their assessment process.
Lenders have tried to produce tick-box-type checklists for their underwriters to work through. They pick up the application and follow the process chart in front of them.
The problem is that our labour market in the UK is now more flexible and fluid than it was 10 years ago. Borrowers now transition from PAYE to contracting because it gives them more flexibility and quite often more money. Others make the transition the other way, seeking security and a pension.
Clients who contract through their own limited company seems to confuse lenders no end: are they self-employed or perhaps employed on a fixed-term contract? Will they be happy to work off the client’s daily rate or do they need two years’ company accounts? It depends entirely on who you ask, quite often at the same bank. Calculating bonus income is another point of confusion.
The root cause of this is banks not trusting their underwriters to assess the case. Instead they would rather the policy book does it, with the underwriter just following the arrows. The problem is that not many applications now fit perfectly into the relevant boxes and, when they don’t, it creates confusion and a fundamental misunderstanding of the case submitted. Very few have a simple “notes” section in the application to explain the client’s remuneration.
The result is a raft of requests for income evidence. In contrast, if we look at the buy-to-let sector where we see rental cover of 145%, it’s easy to process. The key here is that it’s simple for underwriters to follow; that is not the case in the regulated space.
Banks must train their underwriters to understand the multitude of income structures people now have. The longer this is ignored, the more brokers will flock to smaller institutions offering manual underwriting.
Every lender does have a different approach for assessing income, especially the more complex employed income or income from various sources but that’s where the experience of our mortgage adviser comes to the fore. With so many lenders in the market, a good adviser will be able to use their own experience of lenders assessments and criteria (even if the lenders are unsure themselves) and guide their clients.
Metro Bank, for example, will look at each case on an individual basis, quoting ‘if it’s good business we will do it’, whereas a lender like Santander will make no exceptions if it doesn’t fit criteria which is clearly stated on its website.
For more complex cases, mortgage advisers need the experience and knowledge of good business development mangers to be on hand to advise.
Many lenders are now moving to a bespoke ‘shopping list’ of income evidence requirements once the affordability calculator has been run, so as long as advisers make use of the tools lenders make available, they should have a good idea of what lenders require.
I am not sure that complex income cases can be or should be simplified. Cases where clients have complex income structures demand a lender which fully understands the likelihood of that variable income continuing. The lender must be comfortable assessing its frequency, history/track record, degree of variability and the stresses it may exposed to, with evidence to back up these factors, to make an informed lending decision.
All lenders outline to brokers their lending criteria and policy around income assessment. An example of this is where income is variable, the type and frequency of income considered when assessing a prospective borrower from an affordability perspective. The degree of variable pay that lenders will consider will clearly differ between what one lender deems reasonable (50%/75%) versus another, due the very fact that it is variable, and therefore not guaranteed.
Customers can have extremely complex income structures. Some professions have as part of their income half a dozen or more elements, some of which will be variable and therefore only a proportion of that income will generally be considered by the lender to be included in assessing and determining affordability.
Nationwide is an example of a lender which has good practice for variable income sources. Its lending criteria makes clear how it will treat such income, and how it should be keyed on the application. If the adviser is diligent when conducting the application, and submits it together with the appropriate supporting evidence, the case will invariably proceed.
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