Q: How is LTV calculated for shared ownership loans?
A: Taking as an example:
Property value £100,000
Customer buying 50% share (£50,000)
Loan Amount £40,000
The reference to 'valuation', at the end of section E1/2 of the MLAR Guidance dealing with the concept of 'Loan to valuation ratio', includes the following text: 'valuation is to be taken as the most recent valuation of the property which is subject to the mortgage....'
In the case of shared ownership, 'the property which is subject to the mortgage' means that part of the property subject to the mortgage. This is because the lender only has security on part of the property, and not the whole of the property. In the event of default the lender could only reckon on 50 % of the total property value.
In the example quoted therefore, the relevant valuation is £50k, and the LTV ratio is therefore 80%.
Q: How should the LTV be calculated where the reporting lender makes a second or subsequent mortgage on a property where there is already a first charge to another lender?
A: For the purposes of MLAR, the LTV for the reporting lender's second or subsequent mortgage to this borrower should be calculated as follows :
a) Loan (for the purpose of LTV): is the amount of the reporting lender's loan to the borrower plus the amounts of any existing loans to that borrower from other lenders and secured on the same property.
b) Valuation (for LTV): is the amount of the overall property valuation.
Taking an example, where the property is valued at £250k, with the borrower having an existing loan from another lender of £100k. If the reporting lender makes a second loan of £120k then:
(i) Loan for reporting lender's LTV is: £100k + £120k, i.e. £220k
(ii) Valuation for reporting lender's LTV is: £250k
(iii) Hence LTV is (220k/250k)*100 which is 88%.
This has the merit of both making the LTV calculation consistent with that for the 1st charge loan and also produces a more realistic measure of the actual risk posed by the loan. In reality the 2nd charge lender is exposed to a 12 %+ fall in the property value, rather than a 20% fall that would appear to be the position if we were to adopt another approach to LTV that simply looked at the reporting lender's loan of £120k and divided it by the net valuation (ie valuation less existing loans to other lenders) of £150k to give an LTV of 80%.
Q: Should guarantor income be used in the calculation of income multiple?
A: 'Income' in E1/2 means only the income of 'borrowers'.
Thus a straightforward conventional guarantor should be ignored when calculating the income multiple, since that person is not a 'borrower'.
However, if for example a lender has a product for young professionals, where the person that might otherwise act as a guarantor (eg a parent) is instead formally joining the mortgage contract as one of the borrowers along with the young professional, then in those circumstances the parent's income should be taken into account along with the incomes of other borrowers when calculating the income multiple. But we would see the parent's role here as joint borrower rather than as 'guarantor'.
Q: Should capitalised fees be included in the loan amount for the LTV calculation?
A: The firm asking the question noted: section D1 (h) states that sundry debits should not be included in advances, eg fees, unless they are formally treated as part of a loan. If a customer decides to capitalise fees incurred against the loan, but this money is not actually advanced to the customer, should the capitalised fees be included in 'advances for the quarter' and in the derivation of 'the Loan to valuation ratio', as my understanding is that capitalised fees would be treated as part of the loan?
In the example given, 'capitalised fees' would appear to be amounts that are formally treated as part of the loan (ie there is no intention that they should be paid upfront by the borrower, and rather should be repaid over the period of the loan) and hence in accordance with the MLAR Guidance should be included:
- Within the amount reported under 'advances', in for example D1 and in section E,
- In the 'loan' amount used in the LTV analysis in section E1/2
NB: see also related answer to Q9 in section D, dealing with sundry debits.
Q: If the borrower’s credit history changes at the time of a further advance, do we apply this to the whole loan or only to the further advance?
A: Apply it to the total loan amount. That is:
- If the borrower now has an adverse credit history, then against line item E3.1: report the further advance amount under 'Gross advances in qtr', and report the total loan amount under 'Balances outstanding'.
- If the borrower no longer has an adverse credit history, then against line item E3.2: report the further advance amount under 'Gross advances in qtr', and report the total loan amount under 'Balances outstanding'.
The MLAR Guidance now covers this explicitly (see last paragraph of section E3), along with a requirement to formally re-assess credit history at the time of a further advance.
Q: At what point in the process is a borrower’s credit history assessed?
A: The credit assessment undertaken 'at the time of making the loan' (as described in MLAR Guidance: E3, first paragraph) is meant to recognise that lenders will normally assess credit history at an early stage, and that in practice this check is usually made at around the offer stage. While this is somewhat before the loan is actually advanced, it is nevertheless deemed to be part of the overall process of 'making the loan'. (The MLAR Guidance now makes this 'timing' more explicit.)
Q: We use more stringent criteria for assessing credit history when deciding to make a new loan. Can we use this basis for reporting in section E3?
A: The purpose of detailed definitions in the MLAR Guidance is to achieve a number of outcomes: to ensure consistency of reporting by all lenders; to ensure that comparisons between firms can be done on a like for like basis; and to enable meaningful industry statistics to be compiled in due course. We would therefore expect your firm, along with others, to report on that basis, as per the guidance notes. That would not prevent the firm from continuing to use its own criteria for its own assessment purposes, but the MLAR should be compiled on the basis of the specific definitions set out in section E3.
Q: We anticipate some difficulties in compiling impaired credit history (ICH) data for section E3 in respect of loan advances between 31 October 2004 and 31 March 2005. What scope exists for reasonable approximations in respect of this initial period?
A: The firm asking this question noted: our usual credit reference agency will not be able to offer an assessment of ICH for its customers that is fully in line with the criteria in E3 until Q2 2005. It has therefore proposed a retrospective analysis service of regulated advances made from 31 October 2004 to 31 March 2005. Whilst we, as a lender, will ourselves have collected ICH data as part of the application and loan assessment process, this is not necessarily as comprehensive as that implied by the ICH criteria in E3.
The firm does need to assess credit history in respect of all regulated loans made since 31 Oct 2004: how it does this is a matter for the firm. Some firms may have collected ICH information as part of the application form/process, while others may have used credit reference agencies. But it is the firm's responsibility to satisfy the reporting criteria in section E3 of MLAR Guidance, although how it undertakes the necessary assessment is a matter for the firm to decide.
We would also note the section on 'Accuracy' in section 6 of the Introduction chapter of the MLAR Guidance, and in particular the reference to 'close approximations'. Such approximations may be appropriate in limited circumstances and limited duration, for example at the start up of a new reporting requirement. We would hope that this, coupled with the advice in the paragraph above, and the presumption that the firm already has credit history information in respect of regulated loans advances between 31 October and end March, would enable the firm to satisfy the requirements of section E3, noting also that a firm should (if in doubt) err on the prudent side when making an assessment of ICH. For example it would not be unreasonable to classify a case as having an impaired credit history for the purposes of E3 if there was only limited evidence of impairment.
Q: Should missed payments on credit cards be included under impaired credit history in E3?
A: Credit history is based on a number of criteria in MLAR. Each of our criteria is included as a basis of assessing a borrower's past performance in dealing with loans (including both secured and unsecured loans). For many people, their only credit exposure before applying for a mortgage may have been an unsecured loan.
But we can however confirm that we do not view 'unsecured loans' as including any form of revolving credit, for example overdrafts and credit cards.
Q: In section E3 on Impaired Credit History, does the criterion of being subject to an IVA or bankruptcy order 'within the last three years' refer only to the start date?
A: No. The reporting requirements 'within the last 3 years' are based upon the end date of the conditions that the individual is subject to.
The event of 'being subject to an individual voluntary arrangement (IVA) or a bankruptcy order at any time within the last three years' means that the terms/conditions of the individual voluntary arrangement (IVA) or bankruptcy order were in force for at least part of that period.
Thus the test is not simply of when the individual voluntary arrangement (IVA) or bankruptcy order started, but whether the end date of the conditions that the individual is subject to has either occurred within the last three years or is set to occur at some time in the future.
Q: Do loans with extra drawing facilities, reported in E5, also include self-build mortgages as the loan is drawn down in stages during construction?
A: Self-build mortgages are really loans involving stage payments for house purchase and as such should be reported in E6.1/2.
We would not regard such loans as having a drawing facility, and they are effectively ones where staged payments are expected.
As such we can confirm that such loans should not be included in the category of loans covered by E5 (loans with extra drawing facility): where the drawing facility is meant to be one exercisable by the borrower, eg via cheque book, online transaction, or on demand. (The MLAR Guidance now covers this explicitly.)
Q: Do we assess 'first time borrower' status on the basis of the first named party, the second party or both?
A: Section E6.1/2 of the MLAR Guidance, second paragraph, refers to first time buyers as 'FTBs, that is where the tenure of the main borrower immediately before this advance was not owner-occupier'. For this purpose, we suggest 'main borrower' means the borrower having the highest income, and hence it could be either the first or second named.
Q: How should we classify an existing owner occupied residential mortgage where the property is to be let out for a period of time and could come back to a residential loan in due course?
A: Here the firm is wondering whether to reclassify as a buy to let loan. Our advice in such circumstances is that we think it is not necessary to reclassify the loan from its original purpose, if there has only been a change in use.
This is based on the premise that a regulated mortgage contract (RMC) is defined in terms of the conditions pertaining at the time it was entered into. This implies:
(i) that it remains an RMC even if, subsequently, some of the original conditions are no longer satisfied
(ii) and moreover, that only if the loan contract is formally revised or replaced, is it necessary to reconsider the status of the loan.
This approach to loan classification would seem appropriate for other types of loans and not only those which are RMCs.
As a general rule, a loan would only need to be reclassified if there is a further transaction on the mortgage and if that transaction resulted in a different purpose or a different legal status. For example: if the mortgage was formally changed from a residential loan to a buy to let loan, or was converted to a lifetime mortgage, or became a non-regulated contract.
In the example cited, we suggest the loan continues to be reported as Owner occupied until such time as the loan agreement is either formally revised (and in effect a new contract created) or a new contract is issued. This might happen for example if the borrower decided to let the property on an ongoing basis, and the lender formally required a new loan contract. In which case it would no longer be an RMC (buy to let is generally not a RMC: see MLAR Guidance for E6.2) and would then be reportable against BTL at E6.2. But in a temporary letting situation (where the borrower expects to re-occupy the property) a lender may well not formally require a new contract.
Q: How to report 'number' of advances in situations involving stage payments and further advances? A series of five related questions, shown below as a) to e).
A: The firm asking this series of related questions noted: If a new advance has completed, and there has also been a stage payment/payments within that same quarter, the MLAR Guidance states at E1-6 (first paragraph) '... separate advances (eg stage payments) made in the period on the same mortgage should count as a single advance for the ‘number’ column in sections E3, E4, E5 and E6'.
a) If the advance was reported in the previous quarter, but a stage payment or indeed more than one stage payment was made in the period under review, should the number count be '1' for each quarter?
- Yes, this would be the correct reporting treatment
b) If the advance was reported in the previous quarter, but the advance was cancelled during the quarter under review, should the number for the quarter under review reflect this (ie deduct 1 from the number count for the quarter under review)?
- No. Only report actual advances. 'Cancelled advances' (presumably reported under repayments in D1) should not feature in 'gross advances' in D1 or in E3, E4, E5 or E6.
c) If an advance was completed in the reporting quarter, and also completed a new further advance application (not a stage release) in the same reporting period, is this to be reflected by a count of 2?
- Further advances are more complicated, since they appear as a separate item in E6 and they are also arguably distinct from the situation briefly referred to in the first paragraph of the MLAR Guidance on E1-6 (which implies the need to amalgamate staged payments on a single loan, rather than separate loans which is effectively what a further advance is).
- The 2004/79 Handbook Instrument (issued in late Oct 2004) updated the treatment of Further Advances (FA), such that FAs on buy-to-let (BTL) and lifetime mortgages are now to be reported against these line items and not against the FA line at E6.3
- Thus, for consistency of treatment, it would be reasonable to treat the FA as a separate loan throughout E1-6. That is count '1' for original advance, and a further '1' for the FA. This would also match the treatment when reporting balances outstanding, in for example columns 3 and 4 of table E(2), where FA balances are reported separately at least for loans other than BTL and lifetime mortgages.
- So, in the example quoted, and following the above treatment:
- if the FA is on a loan originally for house purchase, then report the FA against line E6.3 with a count of '1' there, and a count of '1' against the 'original' loan (ie advance made in same quarter) reported at E6.1.
- but if the FA is against an 'original' BTL or lifetime mortgage made in the same quarter, then report it within E6.2 or E6.6. In either case, count '1' for the original loan and a further '1' for the FA, for consistency of treatment
- However, we realise that the first paragraph of the guidance could be interpreted to mean that a lender should combine the original loan and the FA made in the same quarter, and treat with a count of '1'. This would be an acceptable treatment. The difference in approaches is not likely to be material in terms of the 'numbers', since few loans in practice are going to be subject to a FA in the same quarter.
- It is therefore a matter of choice for the lender, and systems implications may have an influence. But the first method outlined above would be our recommendation.
d) The firm splits accounts where the customers may require, for example, part of the loan on one scheme, and the other part on a different scheme (particularly relevant where portability is being used from their previous mortgage). Two accounts will be completed. Should this be reflected as a count of 2 or as they originating from the one application should this just be a count of 1?
- It is theoretically possible that the two accounts might be of a different legal type, eg one regulated and the other non-regulated. In which case they both get treated separately, and clearly each should count as '1' for their respective loan types
- but if they are of the same type, then we would expect them to be treated as one loan and counted as '1' for numbers in section E
e) The same principle applies as in d) above. One application but where part of the loan may be on an interest only basis and part on a repayment basis. Two accounts will be created. Should the count in E4 By Payment Type reflect 1 in each band? Alternatively, would this be reflected in E4.3 'combined'?
- Treat as one loan (i.e. count as '1' for numbers); and yes, in section E4, the loan should be classified as 'combined' and reported against E4.3
Q: How should we report the number of accounts in section E4 of the MLAR, given that it is only one mortgage made up of a number of sub accounts with each account potentially being on a different product, interest rate and repayment type?
A: The firm asking the question provided further background, along with an illustration:
- The firm can potentially have a number of accounts for one customer, a primary account, one or more secondary accounts and a further loan account. Primary and secondary accounts generally complete on the same day and just accommodate a customer who wants to split the advance amount on different products and/or repayment types. If a customer requests additional borrowing at a later date, this is also set up on a separate account, with a separate product and repayment type.
- Customer Mr Smith:
- Account 1: (primary), 5.29% fixed rate, repayment mortgage, £50,000, completion date 1 Jan 05
- Account 2: (secondary), 4.74% tracker, interest only repayment type, £40,000, completion date 1 Jan 05.
- Account 3: (further loan), 5% fixed rate, repayment mortgage, £20,000, completion date 30 Jan 05.
The general approach is to treat loans with sub accounts as a single loan for 'number of loans' purposes, except where this is not possible because of different legal types (e.g. if part is regulated, and part non-regulated) or where further advances are involved.
In the example quoted: in E4 the correct treatment would be to classify the overall loan against E4.3 Combined, as this is the intended category for the mixed interest/repayment situation described, with a count of '1' in the number of loans column.
Q: How do we report the number of accounts in section E3 to E6 for instalment releases? Do we just include the account in the numbers when the initial amount is advanced? Or each time an advance is released?
A: The answer for 'numbers' is that the staged released advances should count as a '1' in each quarter when they are advanced. So if a loan for £100k is released as follows the numbers are as indicated:
Qtr 1: initial advance 50k: Count is '1'
If there is also a staged advance on top of this in Qtr1, then add the £amounts together, and report the number of loans as '1' for number of advances
Qtr 2: staged advance of 10k: count as '1' for number of advances
If there are two or more staged advances in Qtr2, still show as '1' for number of advances
Qtr 3: same principle etc.
Q: How to report balances outstanding on Further Advances in E6?
A: The firm asking this question noted: section E6.3 on Further Advance requires number/amount of further advances and number/amount for balances outstanding. As an example the firm provided the following scenario spanning events over four notional reporting quarters Q1 to Q4:
- Q1 - New regulated completion FTB - we will record advance and balance outstanding under E6.1
- Q2 - No Changes on the loan - we will record balance outstanding under E6.1
- Q3 - Regulated Further Advance issued - We will record the further advance in E6.3 and the original loan in 6.1 FTB
- Q4 - No Changes on the loan - We will record the total loan balance outstanding under E6.1?
The intention in E6.3 is for further advances reported here (which, following updates in Handbook Instrument 2004/79, now excludes further advances on Buy to let and Lifetime mortgages) to continue to be reported in columns 3 and 4 in subsequent quarters. But this only applies where it is possible to separately monitor the balance outstanding on the further advance over time.
Thus in the example given, at Q4 we would normally expect the balance outstanding on this further advance to be reported in columns 3 and 4 of E6.3.
However, in circumstances where a separate account is not established for the further advance, it will not necessarily be possible to separately report the balance outstanding on the further advance. Thus it would be acceptable to report the balance outstanding against the category of the initial mortgage.
Q: Are we allowed to adopt the approach given in the final paragraph of the answer to Q15 (i.e. report the balance outstanding on the FA against the category of the initial mortgage), despite the fact that our system does hold FAs as separate accounts?
A: Since some firms will simply not be able to separately report continuing balances on FAs (eg because there is no separate account established for the FA), we are clearly going to experience 'mixed' reporting in E6.3.
As a consequence we need to be neutral as to whether a firm, which does hold FAs as separate accounts, decides to report FA balances separately in E6.3 or combined with the original loan. This is because, as we have realised, the separate recording of a FA in a sub account does not necessarily mean that a firm will be able to separately monitor all of the flows (eg repayments of principal, interest, etc) and allocate them at the sub account level. This is likely to be a particular problem if a borrower makes a single payment to cover all sub accounts. So the answer to the question is 'yes'.
Q: If we are in a position to monitor Further Advances (FA's) separately on line E6.3, does this imply that we also need to include the FA number and amount on one of the lines in each of sections E3 to E5 for the total lines of each section to agree?
A: The numbers and £amounts in each of the 'total' lines for sections E3, E4, E5 and E6 are expected to agree. So the figures on numbers and £amounts for FAs will need to be included on a consistent basis in each of the sections E3 to E6.
Q: How to report lifetime mortgages without headline interest rates?
A: The firm asking the question noted:
- Our Lifetime Mortgage product is not a roll-up and therefore does not have a headline rate of interest applied to each new contract. Instead for a given cash advance we calculate the charge we need to place on the customer’s property by way of a lifetime mortgage. The charge is a fixed amount, repayable whenever the customer dies and the relationship between the cash advance and the amount of the mortgage charge is governed by the customer’s life expectancy and the charges we would allow for over this period.
- As such we are not sure how to complete information on interest rates in D3 and also on income multiples and LTV in E1/2.
Our advice was as follows:
- We think the approach to adopt here is to make use of the 'expected term of the loan in years' which, under MCOB 9.4.10, is part of the information made known to the borrower, and is hence available for use in respect of each loan. Using this figure, it is then possible to work out for each loan, the implied interest rate that has been used in deriving the amount repayable at the end of the loan (ie on death).
- It is the rate (r), which at compound interest, when applied to the loan (L), results in the amount repayable on death (A) after an expected term of years (n): that is, where A= L {(1+r/100) raised to the power n}
- The MLAR Guidance for E1/2 (at (iii) Other) indicates that lifetime loans should be reported against the 'Other' sub-category of Income multiple.
- For calculating the LTV, the loan is known, as is the current valuation of the property, so the LTV value can be computed.
Q: On a Lifetime Mortgage product which will provide a borrower with either a lump sum, or lump sum plus monthly income, or monthly income only, do we report all of these in E6.6?
A: Yes. The original lifetime mortgage advance, plus any drawdowns in that same quarter, should be reported in E6.6 . Any drawdowns in subsequent quarters should also be reported in E6.6 (and also included in other figures for advances elsewhere in the MLAR)
Q: How should bridging loans be classified as to ‘purpose’ in E6?
A: The answer provided was as follows:
- E6 is intended to capture the principal purpose of the loan at the time it is made.
- In the case of a bridging loan, it is not intended that a lender should attempt to identify the ultimate purpose of the loan, since that will only be known when the bridging loan is replaced by a long term loan
- What is appropriate however, is for the bridging lender to identify the purpose (in an E6 context) of the bridging loan itself.
- For example, it may be that the bridging loan is either being secured on a borrower's existing property (in which case it might be coded against E6.7 Other), or is being secured against a new property ( in which case code against House purchase or buy to let). Such details should be known at the time of granting the loan.
- However, in the absence of specific guidance in the MLAR on the treatment of bridging loans in E6, it is likely that firms will follow one of two approaches to classification:
- treat the loan as per normal advances, and classify each bridging loan to what seems the most relevant category in E6.1 to E6.7 depending on the circumstances of each individual case
- alternatively, a firm may interpret the first sentence of E6 'This analysis is to identify the principal purpose of the loan...', as meaning that since a bridging loan is only a short term loan its 'principal purpose' is really to provide a short term funding facility before a longer term mortgage is obtained etc. As such, it would be reasonable to infer that an appropriate categorisation in E6 could be 'E6.7 Other'
- accordingly, we would not have any difficulty if a lender were to classify all of its bridging loans to E6.7
Q: In Section E4.4 guidance notes, it states that 'secured overdraft facilities' are to be included. Is this correct, given that the guidance notes state that balances in E1-6 are to agree with balances in D1 column 7 that excludes overdrafts?
A: The reference in section E4.4 of the MLAR Guidance to 'secured overdraft facilities or secured credit cards' is incorrect. This text should have been removed when the Oct 2004 changes were made to the form and guidance, at the time that the treatment of overdrafts in section D was changed. So please disregard this text. In due course we will amend the guidance notes.