|
Houses in multiple occupations |
|
Part 2 of the Housing Act 2004 introduces a new scheme of licensing for houses in multiple occupation (HMOs). This will replace the registration requirements that are currently operated by Local Housing Authorities. Once designated as an HMO, the property is required to meet certain requirements in relation to firedoors, layout, management etc.
Should the HMO requirements not be met, then a lender selling the property may be faced with accepting a lower sum for the property to take into account works necessary to bring the property up to the required standard.
Whilst the consequences of being designated an HMO remain largely the same, the new licensing requirements are likely to increase the number of properties which are classed as HMOs. Lenders who choose not to lend on such properties may find that there is a decrease in the number of properties on which they are able to lend.
It was planned for the new provisions to be fully introduced at the end of October 2005, however as a commencement order is still to be passed, it is likely that the provisions will come into force later this year.
The Act introduces two distinct licensing regimes:
1. Compulsory Licensing
A house will be considered to be an HMO if it fulfils the following criteria:
- it has three or more storeys (including attics and basements);
- it is occupied by five or more tenants who comprise more than one family (this term includes unmarried couples).
It will then be compulsory for a licence to be obtained from the local authority.
2. Additional Licensing
Local housing authorities also have the option of extending the licensing requirements in their regions. The treatment and extent of the additional licensing will vary between the different local authorities. For example, Southampton City Council is planning to designate all properties of two storeys or more containing more than one household within their entire region as being subject to licences, whilst Hastings City Council only anticipate extending the requirement to a handful of streets. Therefore, it will be necessary to check the requirements of each local authority.
A licence-holder is liable to a fine if he should fail to comply with the terms of the licence.
If a landlord operates an HMO without a licence, then a residential property tribunal may order that rent or housing benefit be repaid to the tenants.
This is an issue for lenders as the potential cost of upgrading the condition of the properties in respect of the costly HMO requirements is not necessarily going to be picked up by every valuer, especially in cases where the property is in good physical condition. The lender may then have to bear the cost of the improvements on a subsequent sale.
In the Buy To Let market, the introduction of licensing may significantly increase the properties subject to the HMO requirements. One way in which lenders who are happy to lend on such properties may protect themselves is by instructing their solicitor and/or valuer to check whether the property is an HMO, and then to ensure that all of the HMO requirements are satisfied.
Mortgage Regulation: Don't be complacent
It is almost a year since responsibility for mortgage regulation passed to the Financial Services Authority (FSA).
The FSA's aims include the promotion of efficient, orderly and fair markets and helping retail consumers achieve a fair deal. It has recently published findings of its monitoring of compliance of the regulations imposed upon the lending industry.
The FSA commissioned a mystery shopping exercise of 82 visits or calls to 62 mortgage lenders and brokers. This was to establish whether firms were providing two key documents required by regulation to inform customers about the type of service a firm provides and about the cost, features and risks of a particular mortgage proposal. The two documents were the Initial Disclosure Document (IDD) and the Key Facts Illustration (KFI). The FSA expressed disappointment at the finding that 55% of firms approached were non compliant.
- 28% of firms failed to provide an IDD or a KFI;
- 15% of firms failed to provide both of the documents; and
- 12% of firms provided the documents but not at the right time.
The FSA has stressed the importance of firms complying with the regulations and warned that it may take action against firms that continue to default in their compliance with these regulations.
The FSA also reviewed 20 mortgage lenders' websites which showed that two thirds of the sites complied with some but not all of the necessary requirements, for example, IDD's were not displayed or they were displayed but not at the right time.
The Council of Mortgage Lenders welcomed the feedback of the survey and highlighted that the exercise had identified good practice within the industry. The Council, however, warned lenders that there was no room for complacency in providing customers with information required by regulation.
In a separate exercise the FSA reviewed compliance by small mortgage brokers with requirements on selling and advertising in the sub prime market. The FSA visited 31 small brokers active in the sub prime market and looked in detail at 21 files to assess whether advisors were taking reasonable steps to ensure that recommendations to take out sub prime mortgages were suitable to the needs and circumstances of the customers.
It found that in 60% of cases insufficient information was obtained about the customer and in 80% of cases there was a lack of evidence to show how the recommended sub prime product met the customer's needs and circumstances. A further 67% could not demonstrate that they had taken account of the additional debt consolidation requirements. The FSA commented that the sub prime mortgages market was identified as a priority area for mortgage supervision.
It is clear that this series of reviews is an ongoing exercise and the FSA has made it clear that non compliance with regulation may lead to enforcement action.
|
|
October 2005 |
