INTEREST-ONLY DEALING FAIRLY WITH INTEREST-ONLY MORTGAGE CUSTOMERS: A GOOD PRACTICE GUIDE FROM HML

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1 INTEREST-ONLY DEALING FAIRLY WITH INTEREST-ONLY MORTGAGE CUSTOMERS: A GOOD PRACTICE GUIDE FROM HML

2 The Financial Conduct Authority (FCA) published its interest-only mortgages thematic review on May 2nd, which detailed what it views as good practice from lenders in dealing with borrowers with these types of mortgages who may be at risk of being unable to repay their loan. This step-by-step good practice guide details what lenders should be doing now and how HML can help on a non-advised basis prior to April 26th 2014, which is the Mortgage Market Review (MMR) implementation date. Post MMR, HML will continue to refine its service to ensure it continues to meet FCA guidelines, mitigates conduct risk and ensures a quality customer experience and appropriate customer outcomes REVIEW THE FCA S GOOD PRACTICE GUIDELINES FROM THE THEMATIC REVIEW PAPER The FCA s thematic review is an easy-to-read document that makes clear exactly what it views as good practice. Using the table on the next page, which notes the different 5 good practice 6 strategies, lenders 7 can cross-reference 8 this against their implementation plan to ensure it meets all of the requirements that are identified in the thematic review paper. In addition, conducting a gap analysis will identify if and where further work is required to ensure all of the FCA s good practice requirements are met.

3 Governance Interest-only strategy options Documented guidance framework Management information Communications prior to maturity Communications post maturity A written strategy detailing the procedural and policy framework for the management of expired term interest-only mortgages Document reasons why lenders haven t offered customers certain options Switch to full or part capital repayment with customer agreement after an affordability check Overpayments Mortgage term extension where appropriate Waive normal fees and charges for customers changing to alternative products or repayments Front-line staff to have a written policy and procedural guidance Give customers (both before and after maturity) appropriate options Assess customer s ability to pay should the mortgage extend into retirement or varying the mortgage term increases repayments Repossession action is a last resort Communications strategy responses Options deployed before and after term maturity Post-maturity rolling options Post-maturity arrears, litigation and repossession Predictive data including payment behaviours Regular and earlier customer contact communications strategy Set out options for customers concerned about repaying their mortgage A simple process A helpline with opening times noted Inform customers of free impartial or independent advice services Communications which encourage customers to contact lender A defined criteria is in place for mortgage product and/or interest rate change Collate information to capture current repayment strategies for existing interest-only customers Provide a balanced position including risks of inaction Regular reviews of a customer s circumstances when forbearance measures are in place Communications tailored to individuals Dedicated staff trained to deal with customers Communications reviews to improve customer engagement Communications followed by telephone campaigns Communications which take into account alternative repayment strategies, such as downsizing Communications adapted for customers currently in forbearance arrangements or arrears Online access to income and expenditure tool

4 2 3 4 LIST THE OPTIONS YOU OFFER YOUR INTEREST-ONLY CUSTOMERS TO REPAY THEIR MORTGAGE The FCA lists several repayment options that are good practice to offer to customers if appropriate to their circumstances. These include converting to part or full repayment, extending the mortgage term and accepting overpayments Lenders should identify the options that they currently offer or are prepared to offer and note any additional borrower criteria that need to be considered, such as whether it is appropriate for the term to be extended beyond normal retirement age. While the FCA lists several repayment options, this step presents the opportunity to develop innovative products and services, such as improved product rates, equity release, shared partnership mortgages and assisted voluntary sales. 3 4 DECIDE HOW YOU WILL DEAL WITH CUSTOMERS POST-MATURITY 7 8 Lenders need to be aware that some customers will need to be contacted postmaturity and be encouraged to engage with their loan provider regarding the repayment of their loan. The outcomes lenders wish to implement for customers with matured interest-only mortgages need to be defined and procedures documented. Some of the tasks that may be involved include establishing robust supplier arrangements, such as with solicitors, asset managers and field agents, and altering the content of letter templates and call scripts.

5 4 DECIDE WHAT INFORMATION YOU NEED FROM YOUR CUSTOMERS The tone and quality of customer communications will set the scene for successful customer engagement. HML has developed call scripts and letter templates for 8 several client customer contact campaigns, with information currently collected including: Whether the customer has a repayment plan What the repayment plan is Is the repayment plan sufficient to clear the loan how does the customer plan to repay any shortfall Any additional information regarding the plan, including its value and when it matures In circumstances where the customer isn t able to repay their loan, an affordability assessment should be carried out to determine the appropriate options available to them DEVELOP A WAY TO CAPTURE DATA HML has developed a customer repayment strategy screen on its iconnect system to capture information about repayment plans. The majority of information that is collected is produced in a measurable format to allow for the effective reporting of a mortgage lender s portfolio. It is useful to compare customers responses to their risk parameters, such as their age, LTV, remaining balance and the remaining term. This creates a clearer picture of each customer and how they should be categorised in terms of communication priorities and the risk of them not repaying their loan at the end of its term. The customer s mortgage file should have a clear audit trail of the deployment of options which evidences which options have been considered and if any were not offered to the customer and the reasons why.

6 DECIDE HOW OFTEN YOU NEED TO CONTACT YOUR CUSTOMERS AND HOW In its thematic review, the FCA recommended in the first instance that lenders need to contact all of their interest-only customers with mortgages that mature prior to or in 2020 before April However, HML has found through pilot studies and customer contact campaigns that getting in touch with an entire interestonly portfolio instigates wider action. In our experience, the greater proportion of customers who instigate a conversion to part or full repayment have a term expiry of approximately 20 years remaining. We have used a combination of letters and phone calls to maximise customer engagement and have worked with clients to produce a contact timeline based on the term expiry date. Based on this date, we state within the contact timeline whether just a letter is required, or also follow-up telephone calls. If a customer confirms they have a repayment plan in place, our iconnect repayment screen can be updated to ensure these individuals are not unnecessarily contacted, ensuring a quality experience and favourable outcomes for the customer REVIEW YOUR OVERALL OBJECTIVES AND HOW YOU INTEND TO DEPLOY THESE Working back through the steps above, a high-level policy document can now be created which includes all of a lender s objectives. Information contained within this document can include what interest-only repayment options are available, who these options are available to and when and how customers should be contacted. This can be shared with front-line staff to ensure communications are tailored towards a customer s individual needs. Lenders need to review the deployment of their interest-only repayment options and assess whether they have performed as expected. Consideration should also be given to how lenders manage their existing contract variation processes, such as waiving the usual fees that would apply when changing the repayment type.

7 4 8 DECIDE HOW TO TRAIN YOUR STAFF AND MAINTAIN SERVICE QUALITY HML has dedicated staff who are trained to respond to interest-only clientspecific needs and who have the required experience and skillset. We also have a dedicated helpline for customers to access. In addition, process flows, call scripts, letter templates, quality assurance checks and a training academy have all been established to ensure a quality customer experience and appropriate outcomes for borrowers. Any interest-only communication strategies will continually need refining and improving to up-skill staff, bolster customer experience and outcomes and to mitigate conduct risk. This requires time, effort and resources, but plays a central role in helping to ensure customers are dealt with fairly.

8 HML GOOD PRACTICE - OUR SUCCESS A 61 per cent customer contact rate from a letter and three outbound calls 10 million worth of balances were converted to full or part repayment following one letter that highlighted access to an online repayment calculator One client HML is working with is now on its fourth successful contact strategy Customer feedback included: I m impressed by your pro-active approach to contacting your interestonly customers, and I m unsure what to do and will speak to an adviser. BENEFITS OF CUSTOMER CONTACT CAMPAIGNS: Early contact instigates customer action and provides them with more time to consider their repayment options Engaging with customers earlier could help mitigate the risk of them facing repossession at the end of term The cost of running a customer contact campaign is low compared to the expense of holding the capital associated with interest-only mortgages Meet expectations set out in the FCA s thematic review Outsourcing customer contact strategies to a third party can allow lenders to focus on the core of their business Start to manage the credit risk within an interest-only portfolio

9 How much time and effort do you spend managing a 200 mortgage arrears case compared to a 200,000 interest-only mortgage? You can discuss interest-only customer contact campaigns within the HML Interest Only Mortgages group on LinkedIn. For more information about good practice and how HML can help, contact product development manager Ben Chambers on or ben.chambers@hml.co.uk

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