Regulator warns over mortgage lending practices

Banking Crisis: THE FINANCIAL regulator is curbing lending practices on mortgages where borrowers have accepted interest-free loans from developers.

The regulator has written to all banks to tell them they must clear any mortgages advanced in conjunction with developers' incentives with the regulator prior to offering such loans.

In a strong signal to the banks that it will clamp down on any unsuitable lending, the letter reminds the lenders of their obligation to ensure that borrowers can afford their mortgages in light of any other loans or deferred payment that they may owe to property companies.

The regulator's action follows a move by two of the State's biggest property developers - Ray Grehan of Glenkerrin Homes and Bernard McNamara - last month to allow borrowers to defer part of their payments by way of interest-free loans.

The schemes are designed to attract buyers, who are finding it difficult to borrow more than 80 per cent of the property prices in the current tight lending environment.

The regulator has decided that these incentives do not in themselves require regulation. "Entities offering incentives of this nature do not fall to be regulated, they are not protected by the consumer protection code and consumers may not be able to refer to the financial services ombudsman," it said in a statement.

But the regulator said it would continue to monitor all new similar financing proposals and that it was seeking details of how the banks intend to assess the suitability of mortgages offered in tandem with the incentives.

Under the consumer protection code, lenders must assess borrowers' ability to afford the repayments on a mortgage in the context of all of their debts, outgoings and deferred payment obligations.

It is understood that the regulator is concerned that consumers who cannot afford to borrow the cost of a property from a single regulated lender will overstretch themselves by borrowing from two separate sources.

Mr McNamara is offering interest-free loans of up to 30 per cent of the selling price to entice buyers to his apartment scheme at Elm Park in Dublin 4, which does not have to be repaid for five years. Under the Glenkerrin Homes scheme, buyers only require a 5 per cent deposit, with the developer offering a deferred payment of 15 per cent of the selling price to be repaid at the end of seven years.

Meanwhile, the financial regulator confirmed that any lending advanced under the Government's Home Choice Loan scheme announced in the Budget is not covered by the Consumer Credit Act and therefore would not be monitored by the regulator.

The scheme is open to first-time buyers who earn at least €40,000 per annum and whose mortgage applications have been turned down by at least two banks or building societies. Minister for Finance Brian Lenihan denied last week that the Government would become a "sub-prime lender" as a result of the scheme.

The regulator also warned mortgage lenders that they "must act in the best interests of their customers" and fully disclose to mortgage switchers the disadvantages of leaving a tracker mortgage for a variable or fixed-rate loan.