29 Mar 2016

The PRA review the buy-to-let underwriting standards

The Prudential Regulation Authority (PRA) has published a consultation on proposals regarding the minimum standards firms should meet when underwriting buy-to-let contracts.

The Bank of England’s regulatory arm expressed that these proposals also include clarification concerning application on small and medium enterprises (SME) supporting factor on buy-to-let mortgages.

The PRA is aiming “to prevent a marked loosening in buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses” as well as enhancing the transparency and stability of its regulatory approach.

The paper proposes the following:
i) A set of expectations for firms that underwrite UK buy-to-let mortgages contracts where the land is intended to be occupied as a dwelling on the basis of a rental agreement, in pounds sterling, regardless of whether the borrower is an individual or limited company; and
ii) A clarification in relation to application of the SME supporting factor on buy-to-let mortgages.
The supervisory statement follows a PRA review of underwriting standards in the buy-to-let sector which consisted of 31 firms. The review highlighted concerns about lenders’ growth plans and how they might be met.

The PRA review found a risk in firms relaxed underwriting standards, which affects their safety and soundness, suggesting a need for microprudential action.

The proposals from the PRA support the Financial Policy Committee’s ability to act from a macroprudential perspective.

A statement from a recent FPC’s meeting has made it clear it will continue to monitor developments, including the impacts of this review and forthcoming tax changes.

“The FPC remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending.

“The macroprudential risks centre on the possibility that buy-to-let investors could behave pro-cyclically, amplifying cycles in the housing market, as well as affecting the resilience of the banking system and its capacity to sustain lending to the wider real economy in a stress.”

By Samantha Atherton