Crackdown on Income Inflation for Self-certified Mortgages

Lenders are cracking down on people who exaggerate their income to secure a bigger loan for self-certified mortgages, a government watchdog says.

The Financial Services Authority (FSA) hopes that a stronger system of checks and controls will prevent people from getting into large amounts of debt.

Self-certified mortgages are intended for those who are self-employed or who cannot prove their income. Borrowers sign off on their earnings instead of providing salary details to secure a loan.

Clive Briault, FSA managing director of retail markets said: "We welcome the improvements made by lenders in the area of self-certification. But in the light of competitive pressures, tighter margins and rising arrears levels, we expect lenders to remain vigilant and to ensure that their systems and controls are regularly reviewed."

Concerns that lenders were encouraging people to inflate their income to get bigger loans which in some cases they struggled to pay back were dismissed by the FSA's latest study.

But some mortgage brokers were found to recommend exaggerating earnings. Three firms out of the 41 investigated were found to offer advice on how clients could lie to secure more money. The FSA has now followed this up with the relevant firms.

The FSA's Mr Briault said: "The findings on sales and advice from brokers show significant weaknesses which are disappointing. Further work needs to be done not only on affordability and suitability checks but also on the record keeping of the advice given.

"But it is encouraging that we have found no evidence to suggest that salary inflation is widespread or systematic within the broker industry.

"We will be working with the firms reviewed and today are publishing a summary highlighting examples of good and poor practice, designed to help intermediaries to understand and meet with our requirements," he added.