How do lenders conduct complex income assessments?

Affordability assessments are now more stringent than ever and the documentation required to support an application is becoming more and more extensive. One would think the latter point would have to follow the former: it stands to reason, right? Wrong. Banks don’t need to ask for this extra documentation – it is a result of failings in their assessment process.

Lenders (particularly those on the high street), have bigger lending policy manuals with more caveats and sub-clauses than any other. They have essentially produced a tick-box-type checklist for their underwriters to work through, so they can simply pick up the application and follow the process chart.

The problem is, our labour market in the UK is much more flexible and fluid than it was 10 years ago. Borrowers now transition from PAYE to contracting because it offers more flexibility and often more money in their pocket (albeit with fewer employee benefits). Others make the transition the other way, seeking security and a pension. Clients who contract through their own limited company seem to confuse lenders no-end: are they self-employed? Or employed on a fixed-term contract? Will they be happy to work off the client’s daily rate or do they need 2 years’ company accounts? It depends entirely on who you ask, often even at the same bank! This is one of many areas of inconsistency we see, another being how bonus income – cash or otherwise – is treated. 

The root cause of this is banks not trusting their underwriters to assess the case. Yet the problem with tick-box criteria, is that not many applications now fit into the relevant boxes and can create confusion. The way brokers are now required to submit applications to banks, feeds this regimented system. Very few have a simple “notes” section in the application to explain the client’s remuneration, so anything the robotic submission portal cannot reflect is ignored.

The result is a raft of requests for income evidence that, at best, is a duplicate of information easily found elsewhere on the submission, or at worst, a document the applicant simply would not have. In contrast, if we look at the buy to let sector where we see rental cover of 125% coming in, although tighter on affordability, this is without a doubt easier to process.

In short, if banks continue down this route, they simply have to spend more time and money ensuring their underwriters are adequately trained to understand the multitude of income structures around. The longer this is ignored, the more brokers will flock to those smaller institutions offering “manual underwriting”, where a person – not a process chart – assesses the application.

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