The FSA comes down hard on unfair mortgage costs

Often, mortgage lenders kick struggling borrowers when they're down, but this is set to change thanks to a planned clampdown...

One thing that really yanks my chain is when financial firms lay into someone who is struggling to make ends meet.

At the top of my list are unfair bank charges levied when borrowers go overdrawn or exceed their overdraft limit without permission. Another nasty trick which riles me is when mortgage lenders punish homeowners with punitive charges once they fall into arrears with their monthly mortgage repayments.

Lost your job? Have a fine!

There are many reasons why borrowers can't keep up repayments on their home loans. Often, these circumstances are partly beyond their control, such as losing a job, overtime or bonus or the 'Four Ds' (death, debt, disability or divorce). Indeed, the vast majority of mortgage borrowers in arrears are genuine cases and are not 'trying it on'.

Hence, is it fair that mortgage lenders force these borrowers to pay hefty penalties for being in arrears? I would argue not, given that excessive charges amount to penalty fines and rarely reflect the true, underlying admin costs.

Last June, the Financial Services Authority (FSA) warned of failing standards in the treatment of cases of mortgage arrears. Later, at the end of October 2009, the FSA fined specialist lender GMAC-RFC £2.8 million for failing to treat customers in arrears fairly. As well as slapping a fine on GMAC-RFC, the FSA ordered it to pay a further £7.7 million plus interest to over 46,000 borrowers.

The FSA ruled that, between October 2004 and November 2008, GMAC-RFC had levied excessive and unfair charges on top of arrears, including a monthly arrears charge of £45. Also, the lender was criticised for failing to agree suitable repayment plans with struggling borrowers, and was too quick to seize properties before considering alternatives to repossession.

The GMAC-RFC set a precedent, causing the FSA to warn other lenders that it would not allow borrowers in arrears to be treated unfairly. This alarmed dozens of lenders which, like GMAC-RFC, apply a monthly charge to all mortgage accounts in arrears. Indeed, five to seven lenders are being investigated at present, so the FSA is poised to hand down further fines.

It's time to play fair

On Tuesday, 26 January, the FSA struck another blow for borrowers when it released its latest Mortgage Market Review paper. In this discussion paper, the FSA proposed that mortgage lenders must:

• not add early repayment charges on arrears charges, nor levy interest on those charges;

• not apply a monthly arrears charge where lender and customer have agreed an arrangement to repay the arrears;

• allocate payments by customers in financial difficulties firstly to clear missed monthly payments, rather than to arrears charges (which can be repaid later);

• consider all options for borrowers, with repossession the last resort; and

• record all arrears-handling telephone calls and to keep all records for three years.

While the FSA's latest proposals will ensure that homeowners in financial difficulties are treated fairly, they will still allow lenders to levy reasonable additional charges for arrears. However, they will prevent lenders -- particularly specialist and 'subprime' lenders -- from levying monthly charges totalling hundreds of pounds to accounts in arrears.

While we're waiting...

Of course, this tightening-up of the rules won't happen straight away. The consultation period for this review closes on 25 April, so it won't be until the second half of 2010 before standards improve. So, the 195,000 borrowers who were in arrears by 2.5% or more of their loan at the end of 2009 aren't out of the woods yet.

In the meantime, and while we wait for the FSA to introduce new rules, you can still protest against unfair charges applied to your mortgage account. First, contact your mortgage lender to register a complaint. It must acknowledge your complaint within five days and reply within eight weeks.

If you're not happy with the outcome, then make a formal complaint to the Financial Ombudsman Service (FOS). The FOS service is free and its decisions are binding on financial firms (but not on consumers, so you could still take your case to court).

Get help from lovemoney.com

If you need further help with your mortgage, lovemoney.com can help.

First, adopt this goal: Pay off your mortgage early

Next, watch this: Getting through the mortgage maze

After, wander over to Q&A to ask other lovemoney.com members for hints and tips about what works best for them?

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

More: The best mortgage deals on the market | Danger for mortgage borrowers