Published on 27 February 2017
Amendments to the PRA’s rules on loan to income ratios in mortgage lending – PS5/17
This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses to Consultation Paper (CP) 44/16 ‘Amendments to the PRA’s rules on loan to income ratios in mortgage lending’ and sets out the final rules for the LTI flow limit to operate on a four-quarter rolling basis.
This PS is relevant to banks, building societies, friendly societies, industrial and provident societies, credit unions, PRA-designated investment firms, and overseas banks in relation to their UK branch activities and the UK subsidiaries of the above mentioned firms.
In June 2014 the Financial Policy Committee (FPC) issued a recommendation to the PRA and the Financial Conduct Authority (FCA) advising that they should ‘ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5’.
In CP44/16 the PRA proposed amending the PRA’s rules to change the current fixed quarterly limit into a four-quarter rolling limit. The limit would still need to be complied with and monitored at the end of every quarter, but the relevant flows of loans for compliance with the limit would now be those during a rolling period of four quarters in total, instead of one quarter as currently applied. These four quarters refer to the immediate quarter under consideration and the three quarters preceding it.
The PRA is now finalising the amendment to the Part proposed in CP44/16. The change is implemented with immediate effect, so that the loan to income (LTI) flow limit is applied on a four-quarter rolling basis from the current quarter onwards. This means that starting from Q1 2017 the PRA would monitor the LTI flow limit on a four-quarter rolling basis, which for Q1 2017 will be incorporating data on flows from Q2 2016, Q3 2016, Q4 2016 and Q1 2017. It is important to note that compliance under a fixed quarterly limit (which was the expectation before this change was introduced) automatically implies compliance with the limit under a four-quarter rolling basis.
Appendix 1 of this PS contains the final rules.
Feedback on consultation responses
The PRA received four responses to CP44/16. All respondents supported the proposal to switch to a four-quarter rolling limit. They agreed that the change is likely to allow firms to manage the limit more effectively, reducing the potential need for sharp changes in lending as a result of the limit.
Policy Statement 5/17Appendix
PRA RULEBOOK: CRR FIRMS, NON-CRR FIRMS: HOUSING INSTRUMENT 2017
Amendments to the PRA’s rules on loan to income ratios in mortgage lending – CP44/16
This Consultation Paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposed amendments to the Housing Part of the PRA Rulebook in respect of the Financial Policy Committee’s (FPC) Recommendation on loan to income (LTI) ratios in mortgage lending in the owner occupied market. The CP also provides additional clarification regarding the scope of the LTI policy.
The FPC’s Recommendation in June 2014 was addressed to the PRA and the Financial Conduct Authority (FCA) (‘the regulators’). It asked the regulators to ensure that mortgage lenders limit the number of new residential mortgage loans made with an LTI ratio at, or greater than, 4.5 to no more than 15% of their total number of new mortgage loans.
Since the FPC’s Recommendation the PRA has continuously reviewed the implementation of the LTI flow limit. The implementation of the LTI flow limit has not raised significant implementation challenges for firms. However, the current fixed quarterly nature of the LTI flow limit could make it harder for some firms to manage their business pipeline.
Summary of Proposals
This CP proposes to amend the PRA’s rules to change the current fixed quarterly limit into a four-quarter rolling limit. In addition, this CP contains additional clarification on the scope of the LTI flow limit regarding interest roll-up bridging loans and mortgages ‘ported’ to another property where there is no increase in the principal outstanding. The PRA will continue to work together with the FCA to monitor developments relevant to the LTI flow limit.
In addition, as outlined in the November 2016 Financial Stability Report (FSR), the FPC reviews its Recommendations on a regular basis to assess whether they remain appropriate. In concluding the 2016 review of its housing recommendations, the FPC has agreed to maintain the LTI flow limit recommendation at its current calibration.
Implementation/ Response
The PRA is proposing that the change to the rules takes effect as soon as practical, with the aim that the first quarter in which the four-quarterly rolling limit would apply would be Q1 2017, subject to the responses to the CP. This would mean that starting from Q1 2017 the PRA would monitor the LTI flow limit on a four-quarter rolling basis, which for Q1 2017 would be incorporating data on flows from Q2 2016, Q3 2016, Q4 2016 and Q1 2017. It is important to note that compliance under a fixed quarterly limit (which is the current expectation) automatically implies compliance with the limit under a four-quarter rolling basis.
Since the proposal does not represent a significant change from the existing policy position and gives firms additional flexibility to comply with the limit, the consultation period will be six weeks. This will allow for a swifter implementation of the change, subject to comments received.
This consultation closed on Tuesday 10 January 2017.