Mr and Mrs Johnson were refused an application for a mortgage from their local Building Society when they visited them in 2007 to review their borrowing and raise some additional cash; the explanation given was that they had “failed the credit score”.
In 2004 they had moved property and took out a 2 year fixed rate mortgage with their Building Society. Unfortunately, they had failed to set up a postal divert arrangement which resulted in Mrs Johnson having a £168.00 County Court Judgement (CCJ ) registered against her at their previous address. This was for an unpaid account she had forgotten all about. This was revealed in a credit reference search carried out when Mr Johnson applied for a car loan in 2005. Mrs Johnson repaid the amount plus costs and had a ‘Satisfied CCJ’.
Mr and Mrs Johnson subsequently responded to an advert in the local paper offering mortgage advice at ‘best rates’. All advertising under Financial Services Authority (FSA) regulations needs to comply with the Financial Services and Markets Act 2000.
At the meeting the broker introduced himself as being experienced and having access to all types of mortgage products. When it was explained to him that a pervious application had been rejected due to failing a credit score duty to a CCJ being recorded against Mrs Johnson on the Credit Reference Agency (CRA) file, he advised, that it would not cause a problem. He said that he had access to sub-prime lenders who would be prepared to lend. His initial advice was accepted.
The broker requested that Mr & Mrs Johnson complete and sign a “generic mortgage application form”. This, he said was accepted by several lenders and would save completing another should they not be able proceed with his first choice lender who he said could offer rates from 4.75%. No other documentation was provided to Mr & Mrs Johnson for information purposes or for their signature. The application form was completed. No lender, rate or loan size was detailed on the form.
Having completed the application the broker explained that he would need to get a decision in principal (DIP) from the lender. This required sending details to a mortgage packager who the broker submitted sub-prime applications to; he also requested a £500.00 fee to cover the property valuation. Mr & Mrs Johnson were given a copy of the completed application form and the broker’s business card; this stated that he was an appointed representative of a network (AR).
The following day a call was received to say that the application had been approved with Advantage (ADV) at a rate slightly higher than previously indicated. It was explained that the loan fell into a higher level of adverse lending as the broker’s first choice lender had previously rejected the application. No supporting evidence was given and only Advantage had been selected by him. This was a single lender product cascade.
The broker recommended that a loan equivalent to 75% of the estimated property value was taken out giving Mr & Mrs Johnson the extra cash they wanted. A monthly payment for an interest only mortgage was quoted, which included all fees. The application form was changed to accommodate his recommendations.
Mr & Mrs Johnson were made to feel grateful that a lender would lend to them, it was a binding decision and they had secured a rate of 5.25%. The broker informed them that he would only charge for his services at successful completion of the transaction; a fee of 1% of the total loan was requested. The broker also recommended a conveyancing specialist who he knew, stating it would ensure a speedy completion and that a fixed fee of £499 was required.
The broker insisted on an authority form being completed ensuring his 1% fee would be deducted from the mortgage completion funds and paid to him directly by the solicitor.
Post submission of application to Advantage via the mortgage packager
Mr and Mrs Johnson later met a friend with whom they shared their experience. Upon hearing the story, the friend mentioned they had a similar credit history. However, their Independent Financial Adviser (IFA) managed to place their mortgage on a ‘prime rate’ with Abbey who accepted their circumstances leading to the CCJ which had been satisfied.
The fees and rates paid were significantly lower and when the overall true cost of borrowing was accounted for, it was clear Mr and Mrs Johnson were heavily penalised for not being given the correct advice. It was also clear there had been number of breaches of the Mortgage Code of Business Conduct (MCOB) the broker had also not treated customers fairly.
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