Given the potential impact that The Mortgage Credit Directive (MCD) will have on house builders next year, a number of developers are in talks with third party mortgage providers, in a bid to avoid having to apply for Financial Conduct Authority (FCA) authorisation.
The MCD, which comes into force on 21 March 2016, will alter regulation around second charge mortgages, including shared equity. Shared equity loans or similar incentives are currently offered by house builders, resulting in a second or subsequent charge being taken over the consumer’s property.
To date, this type of residential property finance has been jointly provided by a house builder and government (e.g. HomeBuy Direct, FirstBuy, Scottish Government New Supply Shared Equity with Developers) or through a government scheme such as the Help to Buy equity loan, which helps finance the purchase of new build properties, although could also be offered by other providers, such as mortgage lenders.
In the FCA factsheet for house builders, the regulator said, "Any house builder that has an existing back book of second charge or shared equity loans or plans to provide these loans after 21 March 2016 will need to meet these requirements and either be authorised by the Financial Conduct Authority to hold permission to carry out these regulated activities, or appoint a regulated third-party to administer the loans."
Regulated activities for house builders include entering into a regulated mortgage contract as lender, and/or administering a regulated mortgage contract and/or advising on regulated mortgage contracts.
New rules are to be applied to both past, present and future schemes and the Financial Conduct Authority has cautioned builders they must act to comply.
Andy Frankish, new homes director at Mortgage Advice Bureau, has said that as a result the larger developers having been talking to third party providers to see if they can arrange these loans under their permissions.
He said, "The larger developers are looking at aligning themselves with third party providers but there are also a number that are looking to sell on the back book."
Shared equity loans will be covered by the MCD, apart from certain schemes available from the government and social landlords. These will continue to be exempt.
Similarly, government schemes such as Help to Buy are and will remain exempt.
However, house builders will need to consider their options when it comes to joint schemes with the government, as only the government portion of the scheme will be exempt following the introduction of the new directive.
With the exception of back book loans that were previously exempt under the consumer credit regime, all other regulated second charge loans that are already in existence will transfer into the FCA's new regime and will become subject to its Handbook rules for Mortgage Conduct of Business as from 21 March 2016.