FCA Guidance Seeks to Reassure Borrowers and Lenders Amid COVID-19 Fallout
A breakdown of the UK Government's COVID-19 measures relating to loans, repossession, and mortgage payment holidays.
The unprecedented series of measures announced by the Chancellor in March were designed to give the UK economy a soft landing from the sheer collateral damage being sown by COVID-19. Some of the most far reaching measures included loans for businesses affected by the pandemic as well as mortgage payment holidays and a near halt on repossession activity, among many others. Whilst these measures were well received by businesses and lenders, it still left many questions unanswered and sometimes raised more questions. Under these circumstances, the FCA has published guidance to reassure businesses and lenders and clarify key issues in the Chancellor’s measures which deserve closer attention. The FCA hopes that the guidance will ‘help firms support consumers’ and reassure both borrowers and lenders that they will receive the support they need. Alexander Edwards, partner at Rosling King LLP, illuminates the pertinent details of the guidance for Finance Monthly.
Central to the Chancellor’s measures are loans to thousands of small businesses across the country, known as the ‘Coronavirus Business Interruption Loan Scheme’. The FCA has made clear that it wants small businesses to be confident that access to the funds promised by the Government will be based on the question of “how their business has performed in the past and its future prospects – not its position today,” acknowledging that applicants for these loans will likely be experiencing exceptional financial pressures when applying for the loan.
This means that lenders must assess the applicants in a new way. Lenders must take into account a range of evidence when approving loans, which will not necessarily be based on the current conditions of a borrower. Such evidence can include historic trading figures and future forecasts.
The FCA has clarified that it is reasonable to expect a borrower’s income to increase in the future and its expenditures to decrease as the effects of the COVID-19 pandemic come to an end. The terms of the loan will also be a relevant factor. Importantly, if the forecasted income does not materialise for any reason then lenders should consider deferring repayments until such time the forecasted income does materialise.
Lenders must take into account a range of evidence when approving loans, which will not necessarily be based on the current conditions of a borrower.
Another central pillar of the Chancellor’s measures is ‘Mortgage Payment Holidays’. The FCA’s guidance makes clear that lenders should be granting borrowers payment holidays for an initial three-month period if they are experiencing payment difficulties as a result of COVID-19. Such payment holidays will also be extended to those borrowers who have suggested that they may potentially experience payment difficulties or indeed to those borrowers who have simply indicated to their lenders that they wish to receive one. Lenders are not expected to investigate the circumstances surrounding a request for a payment holiday.
The FCA has clarified that there should be no fee or charge applied to a borrower’s mortgage account as a result of the payment holiday, except for the additional interest which will be applied. The guidance also makes it clear that lenders may decide to put in place options other than a three-month payment holiday and there is nothing stopping lenders from providing more favourable forms of assistance to the borrower – the FCA suggests that one alternative could be reducing or waiving interest.
Other clarifications by the FCA pertaining to mortgage payment holidays include:
- Lenders shouldn’t be automatically granting payment holidays to all mortgage customers, given the impact payment holidays have on the total amount payable under the mortgage, the term of the mortgage and/or the amount of contractual monthly payments.
- Lenders should be keeping their TCF obligations in mind and engage with borrowers at this difficult time to help borrowers avoid financial hardship as a result of COVID-19.
- Lenders must also ensure that the payment holiday has no negative impact on the borrower’s credit score.
The final set of core guidance issued by the FCA pertains to repossession. The FCA has made it clear that no responsible lender should be considering repossession as an appropriate measure at this time as it is not going to be in the best interests of the borrower and expects all lenders to stop repossession action. The FCA has also emphasised that this applies to all borrowers, not just those whose income has been affected by COVID-19.
Lenders are advised not to commence or continue with possession proceedings at this time unless it can clearly demonstrate that the borrower has agreed it is in their best interest. Lenders should therefore be reviewing all ongoing possession proceedings and those which it intends to commence carefully to ensure that it could clearly demonstrate to the FCA that the proceedings are in the best interests of the borrower.
The FCA has also made clear that lenders must ensure borrowers are kept fully informed and discuss the impacts of suspending any possession proceedings or any moves to commence possession proceedings.
These are uncertain times and it is clear that lenders should be working with borrowers and taking steps to support them during a time of unprecedented financial pressures. The FCA will review its guidance in the coming months as the situation develops and will issue amended guidance as appropriate. Lenders and businesses alike should play close attention to any newly issued guidance in order to protect their interests and ensure that they are sticking to government’s extraordinary programme.