SS2/26 – High loan to income lending — BOE — GB

Supervisory statement 2/26

1: Introduction

1.1 This supervisory statement (SS) is relevant to all firms in scope of the Housing Part of the Prudential Regulation Authority (PRA) Rulebook. PRA rules also require the relevant firms to apply the rules at UK subsidiary level in relation to firms not already within the rules’ scope.

1.2 This statement sets out the PRA’s expectations for firms entering into high loan to income (LTI) mortgages.footnote [1] Specifically, it sets standards for the management of a firm’s ‘high LTI flow’, defined in this SS as the percentage of all ‘regulated mortgage contracts’footnote [2] entered into in a set of four calendar quarters that are ‘high LTI mortgage contracts'. This SS should be read in conjunction with the requirements in the Housing Part.

1.3 Paragraphs 2.4, 2.5 and 3.1–3.7 in this SS apply to firms above the ‘de minimis’ threshold. For the purposes of this SS, the ‘de minimis’ threshold is defined as firms that, during both of two consecutive sets of four quarters:footnote [3]

have entered into regulated mortgage contracts under which the total credit provided is less than £150 million; or
have entered into fewer than 300 regulated mortgage contracts in each of those sets of four quarters.

1.4 For a firm that has previously been below the de minimis threshold but is now above the threshold, paragraphs 2.4, 2.5 and 3.1–3.7 apply to the firm from the start of the second quarter following the end of the final quarter relevant to the determination that the firm is above the de minimis threshold. Once applicable, paragraphs 2.4, 2.5 and 3.1–3.7 will cease to apply if (and for so long as) the firm’s regulated mortgage lending is below the ‘de minimis threshold’.

2: Risk management expectations regarding high LTI lending

2.1 The PRA requires that a firm entering into high LTI mortgage contracts must conduct such business prudently.footnote [4]

2.2 A firm engaging in high LTI lending should have in place a framework of risk management and compensating lending controls to ensure such activity is delivered in a prudent manner. This aligns with the requirements set out in the Risk Control Part of the PRA Rulebook. Where a firm is a member of a group, the risk management framework may be implemented for each relevant firm in the group or at a wider group level as appropriate. Where a group chooses to apply these expectations at group-level, the references to ‘firms’ in this chapter should be read as applying to the group.

2.3 Where a firm makes risk management changes in order to increase its high LTI flow to a level above 15%, the PRA expects it to discuss these changes as part of regular engagement with supervisors. The PRA will expect to see evidence of mechanisms in place to exercise effective oversight of the corresponding risk management and controls, supported with meaningful and well-targeted management information used to inform board discussions.footnote [5] The PRA expects that effective oversight should include:

risk appetite limits on high LTI lending; and
where absent, establishing and thereafter monitoring against any relevant risk limits, of:

(a) the current flow of high LTI lending;

(b) the expected future flow;

(d) the performance of these mortgages.

2.4. In addition, a firm above the de minimis threshold should also:

monitor the aggregate flow of high LTI lending as published by the PRA; and
have assurance of its ability to make adjustments to reduce its future flow of high LTI lending if necessary.

2.5 Where a firm makes changes to reduce its future high LTI flow in accordance with the PRA’s expectations (set out in Chapter 3 below), the PRA may ask to discuss these changes as part of its regular supervisory engagement.

3: Managing the aggregate consistently with the FPC’s 15% limit

3.1. This chapter applies to firms above the de minimis threshold. Where more than one firm within a group is above the de minimis threshold, references to ‘firms’ should be interpreted as applying to the group.

3.2 The PRA expects firms to monitor the aggregate high LTI flow level,footnote [6] as published by the PRA, against the FPC’s 15% aggregate limitfootnote [7] and consider how this may impact the firm’s future flow of lending.

3.3 If, at any point, the PRA and FCA judge that the aggregate high LTI flow is at a level not consistent with the FPC’s 15% limit, they may set expectations for any firm with an individual high LTI flow greater than 15% on a four-quarterfootnote [8] basis to take steps to reduce its future flow. The lenders’ flow is measured on a four-quarter basisfootnote [9] and the aggregate will be monitored on a fixed quarter basis. The PRA expects that a firm’s board should be responsible for overseeing these actions.

3.4 The PRA will publish a measure of the aggregate high LTI flow each quarter (described further in Chapter 4 of this SS). In the case that the aggregate flow is inconsistent with the 15% limit, and adjustments are considered necessary to ensure the aggregate flow becomes consistent with the FPC’s 15% limit, the PRA will set out how it expects relevant firms to respond. When the PRA and FCA consider that the aggregate has returned to being consistent with the 15% limit, the PRA will set out that firms are no longer expected to make adjustments.

3.5 If the aggregate measure becomes inconsistent with the FPC’s 15% limit on a persistent basis, the PRA will set out additional expectations on the PRA website for all firms lending above 15% to gradually reduce their flow of high LTI lending towards 15%. The PRA expects all firms below 15% to remain below this level. Firms should take necessary action to ensure that their individual future flow of high LTI mortgages is consistent with published PRA expectations. This adjustment should apply only to future lending decisions; firms are not expected to withdraw existing approved mortgage offers. Firms are expected to make any necessary adjustments in line with the timelines published by the PRA. Expected reductions in individual flow measures are not expected to be accurately reflected in data until six subsequent quarters have passed following the announcement.

3.6 The rate at which firms are expected to reduce their flow of high LTI lending by will be expressed as a fraction, to be applied to the amount their individual high LTI flow, measured on a four-quarter basis, exceeded 15% in the data available prior to announcement.footnote [10] The PRA will state this fraction, on its website as part of its publication of the aggregate measure. The fractional reduction will apply, calculated at the point of announcement for each successive future quarter, until such time the PRA considers no further adjustment is necessary. The expected adjustment each quarter is based on the reduced excess above 15% expected in the previous quarter, so the percentage size of each adjustment decreases over time. In determining the fractional rate of adjustment, the PRA will give consideration to the latest available data, supervisory intelligence and any known external market factors. For example, the PRA could communicate:

The PRA and FCA expect that any firm, or group where applicable, that has most recently measured high LTI flows in excess of 15% on a four-quarter basis should take action to reduce its future flows. Initially measured at the end of [a given quarter], these should be reduced by [eg one fifth] of the amount its most recent measure exceeds 15%. They should again be reduced by [eg one fifth] in each consecutive quarter until its flow measure is equal to or less than 15%, or these expectations are amended or withdrawn, whichever occurs sooner.

3.7 The following stylised examples illustrate how firms lending above 15% may be expected to adjust following the aggregate becoming inconsistent with the 15% limit.

Example 1

In this example the aggregate measure has gradually become inconsistent with the FPC’s limit. The PRA therefore sets expectations for relevant firms to reduce the percentage point difference by which their individual flow measure exceeds 15% by one sixth in each successive quarter.

	Q-2	Q-1	Q0	Q+1	Q+2	Q+3	Q+4	Q+5	Q+6	Q+7	Q+8	Q+9	Q+10	Q+11	Q+12
Individual high LTI flow (before announcement) on a 4Qs rolling basis	17.5	17.5	17.5
Regulators’ adjustment expectation (1/6th) on a 4Qs rolling basis										17.1	16.7	16.4	16.2	16.0	15.8

Chart 1: Illustrative adjustment path for an individual firm on a 4Qs rolling basis and 1/6 adjustment fraction

Footnotes

A) The Q0 aggregate measure is published in Q+1 and is judged to have become inconsistent with the FPC’s limit. The PRA states that firms with a flow of greater than 15% should reduce the percentage point difference their individual flow measure exceeds 15% by one sixth in each successive quarter, with the first measure based on Q+7 completions.
For the example firm, the most recent measure of its high LTI flow is 17.5%. The percentage point difference its individual flow measure exceeds 15% by is 2.5%. This difference, reduced by one sixth, is 2.1%. Therefore, the firm should take steps to reduce its future flow to no more than 17.1% in Q+7.
For the next quarter, the difference is reduced by one sixth again, to 1.7%. The firm should take steps to reduce its future flow to no more than 16.7% in Q+8. The reduction should be applied successively in each quarter, such that the firm should reduce its future flow to no more than 16.4% in Q+9, 16.2% in Q+10, and so on until further notice.
After the regulators’ announcement, the firm takes action to reduce its future high LTI flow within those expectations.

Chart 2: Illustrative path for an individual firm following withdrawal of adjustment expectations

Footnotes

B) The Q+9 aggregate measure is published in Q+10. The PRA confirms that the aggregate measure has fallen such that it is no longer considered inconsistent with the FPC’s limit. The PRA states that it is withdrawing its expectations of firms to reduce their future flows. The example firm may take steps to increase its future flows, in line with its own risk appetite. In Q+10 and Q+11, the high LTI flow continues to decrease for the firm as it is unable to influence this lending so soon after the expectations were withdrawn.
The Q+12 aggregate measure shows that the firm has, following the withdrawal of expectations in Q+10, increased its flow.

Example 2

In this example the aggregate measure has rapidly and sharply become inconsistent with the FPC’s flow limit. The PRA therefore sets expectations for relevant firms to reduce the percentage point difference by which their individual flow measure exceeds 15% by one third in successive quarters.

	Q-2	Q-1	Q0	Q+1	Q+2	Q+3	Q+4	Q+5	Q+6	Q+7	Q+8	Q+9	Q+10	Q+11	Q+12
Individual high LTI flow (before announcement) on a 4Qs rolling basis	20.0	20.0	20.0
Regulators’ adjustment expectation (1/3) on a 4Qs rolling basis										18.3	17.2	16.5	16.0	15.7	15.4

Chart 3: Illustrative adjustment path for an individual firm on a 4Qs rolling basis and 1/3 adjustment fraction

Footnotes

A) The Q+0 aggregate measure is published in Q+1 and is judged to have become inconsistent with the FPC’s limit. The PRA states that firms with a flow greater than 15% should reduce the percentage point difference their individual flow measure exceeds 15% by one third in each successive quarter, with the first measured based on Q+7 completions.
For the example firm, its most recent flow measure is 20%. The percentage point difference its individual flow measure exceeds 15% by is 5%. This difference, reduced by one third, is 3.3%. Therefore, the firm should take steps to reduce its future flow to no more than 18.3% in Q+7.
For the next quarter, the difference is reduced by one third again, to 2.2%. The firm should take steps to reduce its future flow to no more than 17.2% in Q+8. Applied successively, the firm should limit its future flow to 16.5% in Q+9, 16% in Q+10 and so on until further notice.
After the regulators’ announcement, the firm takes action to reduce its future high LTI flow within those expectations.

Chart 4: Illustrative path for an individual firm following withdrawal of adjustment expectations

Footnotes

B) The Q+6 aggregate measure is published midway through Q+7. The PRA confirms that the aggregate measure has fallen such that it is no longer considered inconsistent with the FPC’s limit. The PRA states that it is withdrawing its expectations of firms to reduce their future flows. The example firm may take steps to increase its future flows, in line with its own risk appetite.
The Q+10 aggregate measure shows that the firm has, following the withdrawal of expectations in Q+7, increased its flow.

4: Calculation and publication of aggregate high LTI

4.1 The PRA will calculate and publish the aggregate high LTI flow figure on its High loan to income (LTI) lending webpage each quarter. The PRA will also calculate and publish the total volume of completed mortgages in scope of the policy and how this compares to the volume of all completed mortgages in the quarter.

4.2 This aggregate figure will be calculated using the FCA’s Product Sales Data (PSD). The PSD reporting periods are the four calendar quarters of each year beginning on 1 January. The aggregate figure will be calculated on a quarterly basis and updated on the webpage quarterly.

4.3 The calculation will consider regulated mortgage contracts as defined in the Housing Part of the PRA Rulebook.footnote [11]

4.4 Mortgages originated by firms below the de minimis threshold are excluded from this calculation.

4.5 If the reported data is revised and there is a material change to the aggregate, the PRA will update the figure.

‘High LTI mortgage contract’ is defined in the Housing Part of the PRA Rulebook as, 'a regulated mortgage contract under which the credit provided by a firm to an individual, or to individuals jointly, is or exceeds a multiple of 4.5 times the individual’s income, or the individuals’ joint income, at the time at which that income is assessed by the firm for the purpose of entering into the regulated mortgage contract.'
As defined in the Housing Part of the PRA Rulebook. The definition excludes buy-to-let mortgages, second charge mortgages, further advances, lifetime mortgages, retirement interest only mortgages, and re-mortgages with no change to the principle sum outstanding.
Two consecutive sets of four quarters means: (1) a first set of four quarters ending on the last day of the immediately preceding quarter; and, (2) a second set of four quarters ending on the last day of each subsequent quarter.
Rule 2.1 of the Housing Part of the PRA Rulebook.
This aligns with the expectations set out in SS5/16 – Corporate governance: Board responsibilities.
Defined as the percentage of regulated mortgage contracts entered into in a given period that are high LTI mortgage contracts.
Chapter 4 sets out that the PRA will publish this figure to enable firms to monitor the aggregate.
One set of four consecutive calendar quarters.
Where relevant the PRA will measure high LTI flow at group level, but this calculation would only include firms from the group that are above the de minimis threshold.
The PRA uses the Product Sales Data to calculate a firm’s high LTI lending.
The high LTI aggregate calculation excludes buy-to-let mortgages, second charge mortgages, further advances, lifetime mortgages, retirement interest only mortgages, and re-mortgages with no change to the principle sum outstanding.

The high LTI aggregate calculation excludes buy-to-let mortgages, second charge mortgages, further advances, lifetime mortgages, retirement interest only mortgages, and re-mortgages with no change to the principle sum outstanding.

The PRA uses the Product Sales Data to calculate a firm’s high LTI lending.

Where relevant the PRA will measure high LTI flow at group level, but this calculation would only include firms from the group that are above the de minimis threshold.

One set of four consecutive calendar quarters.

Chapter 4 sets out that the PRA will publish this figure to enable firms to monitor the aggregate.

Defined as the percentage of regulated mortgage contracts entered into in a given period that are high LTI mortgage contracts.

This aligns with the expectations set out in SS5/16 – Corporate governance: Board responsibilities.

Rule 2.1 of the Housing Part of the PRA Rulebook.

Two consecutive sets of four quarters means: (1) a first set of four quarters ending on the last day of the immediately preceding quarter; and, (2) a second set of four quarters ending on the last day of each subsequent quarter.

As defined in the Housing Part of the PRA Rulebook. The definition excludes buy-to-let mortgages, second charge mortgages, further advances, lifetime mortgages, retirement interest only mortgages, and re-mortgages with no change to the principle sum outstanding.

‘High LTI mortgage contract’ is defined in the Housing Part of the PRA Rulebook as, 'a regulated mortgage contract under which the credit provided by a firm to an individual, or to individuals jointly, is or exceeds a multiple of 4.5 times the individual’s income, or the individuals’ joint income, at the time at which that income is assessed by the firm for the purpose of entering into the regulated mortgage contract.'

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