Q: How should we report on Arrears in section F, if the loan balance is made up of regulated and non-regulated elements?
A: The firm asking this question provided an example and two possible treatments: For example, we have a loan with 3 accounts secured on the same property:
- loan a/c 1 original loan £75,000 - unregulated pre 31/10/04
- loan a/c 2 further adv £20,000 - regulated Nov 04
- loan a/c 3 personal loan £5,000 - unregulated pre 31/10/04 (does not meet criteria of a RMC)
and the firm suggested the choice lay between:
- Amalgamate all balances (re MLAR Guidance for 'F1 to F4' which indicates where more than one loan secured on a single property, these should be amalgamated where possible, in reporting of arrears cases) - but which section would you put the balance in regulated or unregulated?
- Split out the regulated and non-regulated elements but this would mean that we are overstating the number of arrears cases
The answer provided was as follows:
- The treatment of sub accounts in section F should follow the same treatment as adopted elsewhere in the return, which in turn will need to take account of the points made in MLAR Guidance: Introduction, Para 8 (iii).
- If this results in the sub accounts still being treated as a mix of regulated and non-regulated, then the regulated elements should be reported in section F under the regulated items, and the non-regulated elements reported separately under the non-regulated items.
- Numbers of cases: while there could therefore be one case appearing in each of regulated and non regulated, this will be no more than a reflection of the number of separately regulated elements, and is an inevitable consequence of having the regulated/non-regulated categories.
- The reference in the question to MLAR Guidance for 'F1 to F4' and combining loans, only applies where loans are of the same type. Thus if there were 4 sub accounts with each related to regulated loans (ie actual or treatable as such), they could be treated as 'one' for reporting 'Number of loans'.
- The arrears percentage band should be worked out on the loan balance which is the sum of sub accounts of the same type (eg all those that are being reported as regulated)
- In the example, loan a/c 3 is quoted as being a personal loan. Personal loans only count as mortgages if they are secured on land and buildings, and they can be regulated mortgage contracts. (If they are unsecured loans, they are reported in A3.5 (and B2.5) but nowhere else in MLAR.) If they are secured, they are potentially no different to loan a/c 1, and could be treated in a similar way.
- Without further details of the example loan a/cs, it is difficult to give definitive advice on the appropriateness of combining them. For example if loans 1 and 3 are secured loans, which otherwise satisfied the specific requirements of a RMC at the time they were entered into then, following the MLAR Guidance at paragraph 8 (iii) (a) of the Introduction chapter, they could be combined with loan 2 and all treated as one. But if the personal loan is a second charge loan then this element would remain "non-regulated", whilst if unsecured it falls out of D, E and F altogether (as mentioned in previous bullet)
Q: The MLAR guidance indicates that Section F does not need to be submitted for the period April to June 2005. When subsequent reports are submitted, how far back do we need to look for capitalisations?
A: The firm asking this question noted: theoretically an account could have been capitalised several years ago and never performed and would therefore need to be reported using the original arrears balance - this would be extremely difficult to derive.
We would draw your attention to some comments made on Arrears reporting and timing of system changes in PS04/9: paragraph 6.8 (response on category (b) in particular).
This reference to not needing to have modified systems for arrears monitoring in place before 1 April 2005 implies:
a) It is not an obligation: some firms may choose to put modified arrears monitoring systems in place from an earlier time.
b) The 1 April 2005 reference, above, however implies that capitalisations done before that date do not need to be taken into account for the purposes of section F reporting. That is, there would appear to be no need to look through such arrangements and assess arrears as if capitalisation had not taken place: any arrears on such cases would be the amount left after capitalisation. Hence only capitalisations made on or after 1 April 2005 theoretically need to be subject to the criteria set out in section F (ie section 3 of Guidance Notes for section F) on capitalisation and fully performing. Some firms however may choose to apply the new scheme from an earlier date but they are not required to do so though.
Q: Can you clarify the basis for calculating the 'Performance of current arrears %' that we are required to report in Section F?
A: The firm asking the question noted:
- Regarding the 'Payment Received' amount used in the calculation, quite often customers will pay over the amount due when trying to clear the arrears they have on the mortgage account. This is an acceptable policy within the firm and we will accept overpayments where customers are in arrears.
- In Section F, subsection 6.1 (ii) of the guidance notes, it states the following: 'Therefore, in compiling aggregate payment received figures (as part of the payment performance ratio) the contribution from an individual loan in arrears should be limited to no more than the 'payment due' amount.'
- Does this mean for reporting purposes, that for every case that overpays we have to cap the payment received amount to the payment due amount, and in effect constrain the performance measure for an individual case to 100%?
The answer provided was as follows:
This specific guidance needs to be applied at the level of each arrears case, and if the payment received exceeds the payment due on that case, then for MLAR reporting purposes the payment received amount for that case needs to be restricted to the payment due amount. If this approach were not followed, then a firm would be reporting overpayments on one case that compensated for underpayments on other cases, and hence understating underperformance on those cases. Using the approach set out in section F, we get a more meaningful performance measure than we would do otherwise.
If this methodology is followed at individual case level, then the overall ratio entered in respect of all cases on a particular row of F1 to F4 will then be correctly computed.
On this basis, the percentage for a group of loans will not then exceed 100. The validation rules prevent an entry greater than 100 from being entered. However, we would not expect to see '100%' reported much at all, the exception perhaps being where the performance measure on a particular row was based on one or two loans each of which fully performed in the quarter. In contrast, where the performance measure relates to a large group of loans, we would expect a performance significantly below 100 given the reality of arrears case performance (and no individual case contributing more than its constrained maximum as described above).
Q: The validation rules for the performance measure % in F1 to F4 suggest that a zero entry is not expected if there is a balance reported in column 6. But isn't it possible that none of the reportable cases have performed in the quarter?
A: The approach to entering a 'zero' performance ratio in F1 to F4 is:
(i) there is no problem with this on the possession lines, where such a result is not unexpected
(ii) but on other lines, where there is a balance in column 6, we would normally expect a performance measure greater than zero. Hence the validation rule that it should be greater than zero for such lines. This will be relevant in the vast majority of situations in these sections of F and accordingly is a helpful test to ensure a firm does not miss out a performance figure. In exceptional cases however, especially if there are only one or two cases in a line for that measure, it is possible that none of them will make any payments in the quarter, resulting in a calculated ratio of zero. Because of the validation rule however, it will be necessary to enter such a 'zero' as 0.01 in order to 'pass' the rule.
Q: Can you clarify how part capitalisations should be reported in section F?
A: The firm asking this question sought clarification using three examples.
Example 1: Account is £5000 in arrears and is currently reported in the 2.5<5% category (in F1-4). The customer then capitalises £2000 of the arrears leaving them £3000 in arrears, and makes no attempt to repay the outstanding £3000 arrears. Should the account continue to be reported in 2.5%<5% category until it has fully performed for six months?
- In this example, the lender agrees to add the £2000 to the balance outstanding, so that the loan is now formally £2000 greater than before (with £3000 still in arrears) and the borrower is paying a regular monthly payment that has been revised to reflect the now larger loan size.
- However, as the borrower is making no attempt to pay off the outstanding £3000 arrears, then this type of case would not be regarded as falling within the definition of 'capitalisation', nor as ever qualifying for 'fully performing' under section F guidance. So it would also not be eligible for reporting any amount as being capitalised in F5.
- A loan in arrears cannot be considered as 'capitalised', under section 3.1 of section F guidance, unless:
- all arrears are added to the amount of outstanding principal
- part of the arrears is capitalised and added to the amount of outstanding principal, and simultaneously the borrower repays the non-capitalised arrears over a shorter period of time (than the residual term of the loan), and which we have described in the guidance as "a shorter period ranging for example from 3 to 18 months"
- none of the arrears is capitalised, but the borrower enters into an arrangement to repay the arrears over a shorter period of time (than the residual term of the loan), and which we have described in the guidance as "a shorter period ranging for example from 3 to 18 months"; or
- In the example quoted above, the 'arrangement' does not satisfy any of these three alternatives.
- As to reporting in MLAR, on the basis of the information provided in the example, the loan would simply need to be reported in F1 to F4 with the amount of reportable arrears being the extent of arrears at the quarter end (that is after any overpayments, but ignoring any capitalisations), and allocated to the arrears band applicable as if no capitalisation had taken place, that is based on the £5000 arrears. However, in the continued absence of any repayment of arrears, it would not qualify for removal from F1-F4, and hence there would be no amount reportable as capitalised in F5.
- The purpose of the guidance on capitalisations in section F is to ensure consistency and avoid distortions. Clearly if a firm arbitrarily capitalised parts of a borrower's arrears, and made no arrangements for effective repayment of the non-capitalised arrears over a suitable period, then this would distort that firm's arrears reporting in relation to our guidance and in relation to the way in which other firms were reporting (and who were following the reporting criteria in section F on capitalisations and fully performing etc.). It would result in the understatement of the underlying arrears and would imply that a firm's underlying arrears position was better than in fact was the case.
Example 2: The same as the above, but the customer agrees to pay off the remaining £3000 arrears over a period of 18 months. At what time should the loan be removed from F1-F4 and reported in F5 (under cases capitalised in the quarter)?
- In this second scenario, the lender agrees to: capitalise £2000, and simultaneously allow the borrower to repay £3000 over a period of 18 months.
- If this is the case, then this would meet our criteria for 'capitalisation'.
- Moreover, from the time this arrangement commences, if the borrower then fully performs for 6 consecutive months (that is meets the increased monthly payments taking account of the loan balance increase of £2000 on a normal commercial basis, and pays off the expected monthly amount on the £3000 arrears [presumably an eighteenth of £3000 each month]), then the lender should remove the case from section F1-F4 after that six month period and report the loan in F5 as being capitalised.
- This case would not then appear in F1-F4 in subsequent quarters unless of course it later defaulted and went into arrears (but if so, taking note of the reporting treatment set out at section 2.8 of F).
Example 3: Account is £5000 in arrears and is currently reported in the 2.5<5% category. The customer agrees to pay off the arrears over 18 months. At the end of 18 months the arrears have been cleared, would the account continue to be reported for a further 6 months in the 2.5<5% category, then at the end of the 6 months (again assuming it is fully performing) would we report the case in F5 with the arrears amount at £5000?
- As the borrower is repaying all of the non-capitalised arrears over a shorter period (than the residual term of the loan) this type of arrangement is also regarded as an equivalent of 'capitalisation' (section 3.1 of F guidance notes).
- But the fully performing assessment clock starts ticking as soon as this additional repayment arrangement is in place, not after the 18 month period ends.
- The six month criterion therefore starts from that same point (ie as soon as the additional repayment arrangement is in place).
- So if the borrower meets the agreed additional repayments (that is at least one eighteenth of £5000 per month, in addition to the regular repayments on the loan principal) for 6 consecutive months, then the case would qualify for removal from F1 to F4, and the case would be reported as a capitalisation in F5.
- As to reporting in MLAR before the case is removed from F1- F4: on the basis of the information provided in your example, the loan would simply need to be reported in F1 to F4 based on the extent of actual arrears at the quarter end.
In the above examples 2 and 3: what is the amount of arrears to be reported in F1-F4 and F5?
- Reporting of such loans while the arrangement is in place (but before the conclusion of a consecutive period of 6 months of fully performing), and the loan is reported in F1 to F4: the amount of arrears at the financial quarter end in column 5 of F1 to F4 should reflect the amount of arrears (ignoring any capitalisation) that then exists after accounting for any overpayments, since the arrears are being reduced each month through actual payments.
- Reporting of such loans in F5, (when the loan is removed from F1 to F4): the amount of arrears in field 4 of F5 should be the amount of arrears (ignoring any capitalisation) that then exists after any overpayments, since the arrears are being reduced each month through actual payments. Field 5 of F5 would be the loan balance outstanding: so if the loan was for £100,000 and arrears rose to £5000 before the arrangement, then the figure in field 5 would be £100,000 plus the residual amount of the £5000, that is after the amount paid off under the arrangement (presumably 6/18ths of either £3000 or £5000 respectively in the two examples).
Q: Are all types of 'arrangements' eligible to be treated as 'capitalisations' in section F?
A: No, not every type of arrangement will be relevant, and only those that satisfy the specific criteria in section 3 of the guidance for section F will be eligible.
A loan in arrears cannot be considered as 'capitalised', under section 3.1 of that guidance, unless:
- all arrears are added to the amount of outstanding principal
- part of the arrears is capitalised and added to the amount of outstanding principal, and simultaneously the borrower repays the non-capitalised arrears over a shorter period of time (than the residual term of the loan), and which we have described in the guidance as 'a shorter period ranging for example from 3 to 18 months'
- none of the arrears is capitalised, but the borrower enters into an arrangement to repay the arrears over a shorter period of time (than the residual term of the loan), and which we have described in the guidance as 'a shorter period ranging for example from 3 to 18 months'
It is perhaps worth emphasising, as in section 3.2 of section F, that 'The decision to 'capitalise' (or treat as if capitalised) is a business decision between the firm and the borrower'. That means it must be a conscious decision by the firm to treat a borrower in this way.
That implies that any such treatment of an arrears case needs to be explicitly classified as such in any monitoring of arrears, since not all cases involving “some kind of arrangement” will necessarily be ones that a lender will want to regard as a 'capitalisation' (or equivalent). For example a lender might wish to 'test' a borrower's willingness/capacity to reduce an arrears position (by some degree of modest overpayment) initially, before deciding to go for a full or partial capitalisation (or indeed no capitalisation, but repayment of arrears over a defined period).
Q: Where an eligible Arrangement case (involving payment of arrears over a set period) has made satisfactory payments for 6 consecutive months and has therefore become performant this quarter, but on which at the reporting date there are arrears outstanding of less than 1.5% of the loan balance, should the loan be reported (i) in F5 as a performant case or (ii) not in F at all since the arrears are now below the general 1.5% threshold for reporting section F?
A: By 'eligible Arrangement case' we mean a case that satisfies the criteria set out in Q6 and is eligible to be treated as a 'capitalisation' case. In this case, the borrower is paying off all past arrears over a set period. The approach to reporting such a case is based on the following:
- cases of this type can be 'removed' from F1-F4 in two ways
- after they perform for 6 consecutive months, at which point:
- if remaining arrears are above 1.5%: they would otherwise stay in F1-F4 unless we had the 'fully performing & removal from arrears' criteria in operation (as set out in section 3.2 (iii) of the Guidance on F), so the treatment is to report them in F5 since they are only being removed from F1-F4 because of those criteria .
- if remaining arrears are below 1.5 %: they are no longer reportable in F1-F4 because the level of arrears is below the reporting threshold of 1.5%. Hence they drop out of F1-F4 without the application of the 'fully performing & removal from arrears' criteria, and so should not be reported in F5.
- as soon as the level of arrears falls below the 1.5 % threshold. This could be after any time from 1 to 6 months. Again, they are not reportable in F5
See Q3 in this section, and specifically Example 3, which deals with an example of a case involving repayment of all arrears over a set period.
Q: When assessing an arrangement case for compliance with the 'fully performing for 6 months' criterion, can we take in to account any flexible payment features attaching to the loan?
A: The firm asking the question noted that:
- Following capitalisation of arrears, a borrower would have to make 6 consecutive full monthly payments before being removed from the arrears figures disclosed in the MLAR. As the vast majority of our mortgage products have flexible features (ie allow for overpayments and subsequent underpayments), we could be faced with a situation whereby a borrower's total monthly payments within this 6 months period are equal to or greater than the sum of the expected payments, but may not necessarily have been made in equal instalments. For example, a borrower with a contractual monthly payment of £1k per month would have an expected payment pattern of 1-1-1-1-1-1. However, if they were to overpay and then underpay during the period, they could have payment patterns such as 1-2-0-1-1-1 or 2-2-0-1-0-1 without going into arrears. This would be allowable under the terms and conditions of their mortgage.
- Assuming that a borrowers total payments equal or exceed the expected payments in the 6 months since capitalisation and during that time the borrower had not at any point fallen back into arrears, am I correct in assuming that the 6 consecutive payments condition has been satisfied and that borrower can be excluded from the MLAR arrears disclosures?
The answer provided was as follows:
The guidance on 'fully performing for 6 consecutive months...' needs to take account of the underlying contractual conditions attaching to the mortgage.
But what is key here, is that each monthly payment must individually satisfy the terms and conditions of the mortgage. Thus in the circumstances of a flexible mortgage, of the kind you mention, a borrower would need to meet the minimum contractual (as specified by the terms & conditions) payment each month in the 6 month period (any failure in any month would then lead to the 6 month clock being restarted). If those mortgage terms and conditions permit such a borrower (who is in arrears) to vary monthly payments (including to overpay and perhaps even miss a payment), then the monitoring of the arrears case and its compliance with the '6 consecutive months fully performing criteria' would need to take such variations into account.
Hence, in relation to the question in your final paragraph, the fact that a borrower had paid in total an amount equal to or exceeding the 6 monthly payments, would not of itself guarantee compliance with the "fully performing for 6 months " criteria. For example: if a monthly payment had been missed (and such an option was not a part of the mortgage terms & conditions); or if in any month the payment was below the contractually expected minimum. However, providing your expression "the borrower had not at any point fallen back into arrears" was intended to cover these types of breaches of the contractual terms, then your assumption here would be valid.
Q: Should those cases reported as being subject to an arrangement, in F5 column 7, exclude any arrangement case where the borrower is not up-to-date with the rescheduled payments?
A: No, we would expect a firm to report a case as being subject to an arrangement in F5, irrespective of its performance status. That is, it covers cases where the lender has entered into an arrangement (as we describe in paragraphs 3.1 and 3.2 of Guidance Notes) recognising that not all cases will be fully performing every month, so we would not expect lapses to result in reclassification (unless a lender formally cancelled the arrangement).
Our reporting criteria go on to advise how such lapses should be treated (the 6 month clock restarts again) but we think these cases should continue to be treated as arrangements.
Q: What is the basis for reportable arrears on a capitalisation case that subsequently defaults, when not all of the original arrears were themselves subject to full capitalisation?
A: The firm asking this question noted: section 2.8 of the guidance for section F sets out the basis for reporting a subsequent default on a capitalisation case that has at one time been removed from section F1-F4 after satisfying the fully performing criteria. But how does the comment that “the previously capitalised arrears should not be reinstated as current arrears” apply to cases that did not involve full capitalisation of arrears?
The answer provided was as follows:
The comment in section 2.8 that 'the previously capitalised arrears should not be reinstated as current arrears' is meant to reflect a business practice as between the lender and the borrower, and to a lesser extent an aspect of loan account recording.
Thus the business practice is: once a lender has formally capitalised arrears (ie added to loan balance and created an enlarged principal etc.), the borrower's 'arrears' have formally been added to the loan and the borrower is no longer contractually regarded as having those arrears. (After such an event, some lender's systems will no longer be able to easily identify the 'old arrears' in the event of a subsequent default: this is the aspect related to loan account recording.)
That is not the same however where a borrower is paying off 'non-capitalised' arrears. In those cases, such amounts of arrears are not 'capitalised' and they remain an outstanding obligation of the borrower repayable over a shorter period (ie shorter than the residual term of the loan, which is the period in the case of a capitalisation).
So in the case of a loan with non-capitalised arrears, we believe the correct treatment is for the loan to be reported in section F (at such time that it subsequently defaults) on the basis that 'amounts of arrears' should reflect the full amount contractually owed by the borrower at that time, and not any lesser amount that might arise were the 'residual arrears balance at the time the loan had met the 6-month test, and had been removed from reportable arrears' to be excluded. This fits with the guidance at section 2.8: since the arrears in such cases have not been 'capitalised', there is no 'capitalised arrears' to be considered for any possible re-instatement, as the amount of arrears on the loan remains a repayable short term obligation (and which is only reduced by actual overpayments made).
So, as an example, if the loan involved arrears of £5,000:
- of which £2000 had been capitalised, and
- leaving non-capitalised arrears of £3,000, which under the formal arrangement between lender and borrower were required to be paid off over say 15 months (ie, £200 per month)
- and thus the residual non-capitalised arrears, after 6 months of fully performing and at the time the loan was removed from F1-F4, would be £1,800 (ie £3,000 less 6 months repayments of £200 a month)
- then in the event of a subsequent default, say 5 months after removal from F1-F4, the reckonable arrears would then be:
- zero in respect of the capitalised arrears of £2,000; plus
- £1000 in respect of the non-capitalised arrears (this is the £1800, less 4 further payments of £200, before missing a payment in month 5); plus
- the amount of arrears from the missed payment in month 5 (this might be the normal monthly amount on the whole loan and/or the missed £200)
- which when added together, and if amounting to 1.5% or more of the loan balance, would mean the loan was again reportable in F1-F4
Q: If a capitalisation case qualifies for removal from F1-F4 during the reporting quarter, but subsequently defaults before the same reporting quarter end, should it still be reported in 'F5 Capitalisation of arrears cases in quarter'?
A: Using as a basis, the guidance in section F5, under the subhead 'Capitalisation of arrears cases in quarter', the answer to this is that if such a loan is still reportable in F1 to F4 at the end of the financial reporting quarter, then it does not qualify for inclusion in F5 since as the guidance says it has not been 'removed' from the figures which now appear in F1-F4 (even though the case satisfies the other criteria for fully performing). Whether such a loan is still reportable in F1-F4 will depend on the level of qualifying arrears at the quarter end: taking account of section 2.8 criteria, and the amount of new arrears arising from the fresh default (see also Q10 for an example).
Q: In the case of possession sales in F5, should 'balance outstanding' take account of sale proceeds?
A: In the context of possession sales during the reporting quarter:
- balance outstanding is commented on in section F5, in the second paragraph
- under the sub-head 'balance outstanding', it explains that balance outstanding 'is as defined in section F/1 paragraph 1.1' (NB: this appears on the 2nd page of section F guidance notes).
- it also mentions 'including in the case of properties sold the costs of sale where these have been debited to the borrower's account'
- although it mentions that 'it should be the balance at the end of the quarter', this needs interpretation if a loan has ceased to exist during the quarter, as for example with a property in possession that was sold during the quarter. If the loan is still in existence at the reporting quarter end, then it is the balance at that date, but if the loan has been taken off the books sometime during the quarter, then the balance outstanding is the balance on the loan (ignoring sale proceeds) immediately before it was taken off the firm's books
Thus for loans where the underlying security has been taken into possession and sold, the 'balance outstanding' means the amount of the borrower's loan, but disregarding any revenue or proceeds from the sale. It is the borrower's indebtedness to the lender therefore, taking account of all the potential items mentioned in section F, paragraph 1.1, (including any suspended interest not included in the balance sheet (see last sentence of 1.1)), and including the extra item from the third bullet above, namely 'including in the case of properties sold the costs of sale where these have been debited to the borrower's account'.
So if for example:
- the original loan was for £100k, a few years ago, and on an interest-only basis
- on a property then valued at £120k, but say now valued at £150,000
- with accumulated arrears of interest, miscellaneous debits/charges of say £10,000 up to the time when the property is taken into possession and sold,
- and the property is possessed and sold for £125,000 (distress sale at less than market value) with sale costs of £6,000 being charged to the borrower's account
- the 'balance outstanding' in F5 column 2 is £116,000 (original 100, plus arrears of 10 and sale costs of 6)
- but the sale proceeds are not relevant for the purposes of F5. (The borrower would presumably receive the net proceeds of £9,000, ie sale proceeds less loan indebtedness, that is £125,000 less £116,000)
Q: When should a possession case be removed from F1-F4?
A :The following comments provide details:
- A loan where the property is taken into possession should remain in F1 to F4 (eg, at F1.6, F2.6 etc.) until either the 'possession' is reversed (a rare but theoretical possibility) or the underlying property acting as security is sold.
- Once the security is 'realised', and the property sold, the loan no longer has the same characteristics. In particular the loan is no longer secured on property.
- Once the property has been sold, the loan should be removed from F1 to F4 and reported in F5 as a possession sale.
- The basis for reporting the balance outstanding in column 2 of F5 is dealt with in Q12.
- Thereafter, the loan is not reportable in section F at all.
- Any residual debt owing to the firm (i.e. borrower's full loan/debt obligation to the lender, less the amount of sale proceeds from the sale etc.) is no longer a 'secured loan', and a lender would probably carry this in its balance sheet as 'other assets'. The lender then has the choice to write this residual debt off, or seek recompense from the borrower or third parties (eg if mortgage indemnity policy is in place).
Q: Can you clarify whether sales shortfall accounts, arising from possession sales, should be reported as secured loans (regulated or non-regulated) or other loans, as the loan is no longer secured by a property? The reference to 'probably' in Q10 of section F suggests there may be alternative treatments.
A: The answer provided was as follows:
- In Q10 we referred to: 'any residual debt owing to the firm (that is the borrower's full loan/debt obligation to the lender, less the amount of sale proceeds from the sale etc.) is no longer a 'secured loan', and a lender would probably carry this in its balance sheet as 'other assets'. The lender then has the choice to write this residual debt off, or seek recompense from the borrower or third parties (eg if mortgage indemnity policy is in place)'
- On that basis, the word 'probably' was used because it was previously recognised that accounting opinion as to classification was not hard and fast.
- Certainly the loan is no longer secured. So it should not be reported as Regulated or Non-regulated. Also given that it is not secured, it cannot be classified as 'Other secured'. That means it is not reportable in sections D onwards.
- This leaves A3.5 Other loans (which includes unsecured), and which ties back to A1.6, or 'other assets'. We are neutral as to which of these is used, and could not say one is obviously preferable. At the end of the day it really depends on how your auditors see it being reported in the balance sheet. So the choice is a matter for the firm, in conjunction with advice from its auditors
- For further detail on what might go in A3.5 please see Q2 in section A of FAQ document.
Q: If a loan is maintaining its revised payment schedule under a formal Arrangement that qualifies to be treated as 'a capitalisation', but the loan attracts fees in the meantime, does this count as a temporary increase in arrears (per section 3.2 of F), thus requiring the lender to start the 6 consecutive month monitoring process again?
A: The firm asking this question noted: It is common practice to charge a 'monthly arrears management fee' for each month that the loan remains in arrears. Thus as an example:
- 1st Jan - arrears balance = £1000, formal arrangement established to collect current contract payment plus £200 towards clearing arrears
- 31st Jan - monthly arrears management fee raised for £30, arrears balance now £1030 i.e. a 'temporary increase'
- 1st Feb - borrower correctly pays current contract payment plus £200 towards arrears, arrears balance now £830
- thus the borrower is maintaining the revised payment schedule, but the arrears have temporarily increased.
The answer given was as follows:
Fees (as described in your example) would appear to be part of the borrower's total debt (see section 1.1 (iii) in section F of the guidance). As such, they should be considered as a part of the arrears situation when the revised repayment schedule is being established:
- the impact of the monthly fee on the revised payment schedule will depend on whether the lender requires the fee to be repaid monthly or allows it to be added to the loan and repaid over the residual term of the loan (see section 2.3 (iii) of section F)
- thus if the fees are properly included in a revised payment schedule, then we would not regard them as giving rise to a temporary increase in arrears
- for example , using your illustration, and modifying it for monthly fees, it would appear that a fully inclusive repayment schedule could be say:
- arrears 1000; repayable over 5 months ; plus 30 fees a month, giving a monthly repayment of 230
- or, assuming borrower can only manage 200 a month, then it will take 6 months to pay off arrears of 1000 plus 5 or 6 monthly fees
Looking at this type of situation more generally, the following comments on dealing with arrears charges are also relevant:
- charges such as fees need to be handled, in terms of arrears monitoring, in a way that recognises when the fee is contractually payable. Normal commercial practice, and perhaps even a lender’s terms and conditions, would normally recognise that there needs to be a time interval between raising a charge and its expected payment, eg within a week, a month etc.
- only payments that are contractually overdue should be 'counted' as being in arrears (see section 2.3 of section F Guidance)
- thus the fact that a charge has been debited to a borrower's account, would not of itself constitute an increase in arrears at that point in time. Rather, it might give rise to an increase in reckonable arrears if it was not paid by the time it was contractually due.
Q: How should we classify an arrears management case under F5 if the borrower does not accept our proposals for a concession or an arrangement?
A: Since in effect, there is neither a concession nor an arrangement actually in place, as the borrower has not agreed to or accepted such an offer by the firm, we consider that such cases should be classified as 'No concession/ arrangement', and thus included in the final column of F5.
Q: How should we determine the amount reportable as 'arrears' where the loan conditions are such that, in the event of a default, the full loan is repayable on demand?
A: The answer provided was as follows:
- The amount to be reported as arrears is the amount overdue as at the date of making the formal demand (as defined in section 2.1 and 2.2 of section F of the guidance notes). For example, if arrears amounted to £10,000 on a loan of £200,000 the figure to be reported as arrears is £10,000 (even though, in the case of a formal demand having been made, the full debt of £210,000 is contractually repayable on demand)
- If a firm subsequently agrees to no longer enforce the 'on demand' condition, and instead decides to capitalise some or all of the arrears, then the case should continue to be reported as an arrears case in section F of MLAR until such time as the case satisfies the 'fully performing' for 6 consecutive months criteria for capitalisation cases, as set out in section 3.1 and 3.2 of section F of the guidance notes.
Q: For a loan where no periodic repayment is expected until the loan facility or fixed term expires, should we treat the amount of 'arrears' in F1-4 columns 2 & 5 as being the whole loan amount then due?
A: The firm asking this question further noted:
- This type of loan, such as a building finance case, is where the loan involves: interest being rolled up, no instalments being made, and the loan repayable in full (with interest etc) when the facility or fixed term expires
- As such, since the whole loan (including rolled up interest) falls due when the facility or fixed term expires, our thinking is that should the borrower default then the 'arrears' for columns 2 & 5 could be taken to mean the full loan amount including interest.
The answer provided was as follows:
In line with our previous advice in Q13 of section F, and for reasons of consistency across firms in reporting the amount of pure arrears in columns 2 & 5, we are advising firms in this type of situation to only report the amount of interest that is overdue when the loan facility or fixed term expires.
Q: We understand the FCA does a reconciliation check on possessions in F and H. Can you explain?
A: For possession cases, we look at stocks and flows to see if they appear to reconcile between adjacent quarters. Here we look at:
- possession cases at the end of the previous quarter
- deduct possession sales in say F5
- add new possession cases this quarter
- and then compare the result with the possession cases at the end of the current quarter.
- The difference is the number of other cases that have been 'removed' from possession figures reported at the end of the previous quarter. Removals can be for a variety of plausible reasons (eg a case improves and goes out of possession etc).
- Where this implied removal figure is either very large or negative, we believe there may have been an error in one or more of the figures reported, and we ask a firm to provide an explanation, and where necessary to submit revised figures.
In some cases, the explanation provided indicated that another factor was responsible for the reconciliation difference: namely possessions taken and sold in the same quarter, where in some cases a firm had not included them fully in the reported figures. This is the subject of Q20 below.
Q: How should we deal with possessions where the property is taken into possession and sold in the same quarter?
A: Our understanding is that some uncertainty has arisen as a result of the subhead for F5 being 'Those cases no longer reported (ie not included in F1 to F4.7) since, in the case of a possession taken and sold in the same quarter:
- such a case would not have previously been included in F1 to F4 in the previous quarter
- and neither would the case be reported in F1 to F4 (columns 4-6) of the current quarter, since it had been sold during the quarter and was not in possession at the end of the quarter.
Moreover, if a firm had no properties in possession (PIPs) at the end of the quarter, but had taken and sold several cases in the quarter, it would face a validation rule error were it to report new cases in say F1.6 (columns 1-3) and zeroes in columns 4-6.
- this is because there is a validation rule that requires cols 4-6 to be at least as much as cols 1-3 (in most cases this is quite logical, but obviously for a PIP taken and sold in the same qtr it appears less so). So where a firm only has PIPs taken & sold in same quarter to report, it would need to report it in both cols 4-6 as well as cols 1-3
- as such, we and the firm included, would both need to interpret the figures in say F1.6 columns 4-6 as representing 'normally balances on cases in possession at the qtr end but, in the case of a possession case(s) taken into possession and sold during the qtr, it may also include or entirely represent balances on such possession cases prior to sale'.
As a result of the above, our advice on treatment of cases that are taken into possession and sold within the same quarter is as follows:
- include all such cases as 'new possessions in the quarter’ in for example F1.6 columns 1 to 3
- where the corresponding end quarter figures in columns 4-6 of for example F1.6 are less than those reported in columns 1-3 then, because of the currently applied validation rules, it will be necessary to modify the reportable entries in columns 4-6 so that they are in each case not less than those in the corresponding fields of columns 1 - 3. (In due course it may be possible to amend the validation rules to avoid such distortion, but we do not know how soon this will be achievable.)
- include all such cases as ‘possession sales in the quarter’ in for example F5.1 columns 1 & 2
Q: How should we report second charge possessions?
A: For MLAR reporting, it is worth noting that a 2nd charge loan is a non-regulated loan, and so even where the same lender makes both first and second charge loans to a borrower on the same property, the two loans will be reported separately (including for arrears and possessions purposes) so when 'numbers of loans/loan accounts' are concerned each will count as '1'.
There are two broad types of situation with second charges:
(a) where the firm (say firm A) has originated a second charge loan itself
(b) where the firm (say firm A) has a first charge to a borrower on a specific property, and another lender (say firm B) has a second charge loan on the same property.
In (a), the firm A should report this as a possession since the firm has initiated the possession itself. The firm should also report it as a possession if it becomes aware that either the 1first charge lender (or a third or subsequent charge lender) has obtained possession.
In (b), and assuming the other lender firm B (holding the second charge) has initiated possession, then firm A should, if it becomes aware of this event, still report its own first charge loan as a possession since in practice that is the status of its own loan.
In some instances the second charge lender will not be regulated, so there is no duplication for MLAR aggregates. In other instances, where both lenders are regulated, there is potential for some duplication: however in practice this may not arise, not least because one of the firms may not realise that the other has taken possession, or only becomes aware when the property has been sold, at which point it may not be reported in its MLAR because it was not able to report it as a possession in its latest MLAR. There is however the potential for some very limited duplication, but we cannot avoid it happening.