Nearly three years before statutory mortgage regulation John Tiner, the then Managing Director of the Financial Services Authority, said during a speech at the Council of Mortgage Lenders conference “We would not wish to see, for example, a relaxation of loan to value or rental cover without lenders first making a clear analysis of the risks”. His 4 December 2001 comments were primarily aimed at the opportunities and risks in the buy-to-let market however, his point was well made. Clearly, he was advocating that lenders adopt some form of stress testing when designing products or changing lending criteria.
It is clear to anyone who has reviewed lending policy changes during the period 2004 to 2008 that there was a loosening of criteria in all aspects of credit policy and across all product types. An analysis of Moneyfacts data shows that these changes were often driven by new entrants, with traditional building societies playing ‘catch up’ to maintain market share.
So where would you expect to see the results of lenders stress testing analysis in advance of criteria changes? In our view the results of the tests and calculations should be attached as appendices to the credit committee minutes at which the decision to amend criteria was taken. However, in our experience defendant solicitors do not obtain such documents and claimant solicitors do not volunteer them. When they are provided to us we often find the decisions were based on ‘me too’strategies to maintain market share rather than a proper assessment of risk.