City watchdog at last puts in the boot and lays down tough new rules on ‘Sale and Rent back’. 

The FSA has announced sweeping new rules to regulate ‘Sale and rent back’ or ‘Fire sale’ schemes which are offered to mortgage holders facing repossession. 

In these schemes, the seller usually remains in the property upon its sale and they pay rent, in effect becoming the tenant. 

This type of sale has attracted criticism from consumers, the media and debt advisers as many such sales have favoured the buyer, leading to the ex home owner being evicted from the property after only a few months into their new tenancy agreement. Also, many claimed they were preyed upon and taken advantage of because of their desperation and vulnerability. 

The Office of Fair Trading (OFT) initially carried out an investigation into how the conduct of the industry and the process for distressed mortgage holders could be improved and their findings have resulted in this type of selling scheme now being fully regulated by the FSA. 

There is little reliable data on the size of the industry but up to October 2008 the OFT believed there were upwards of 1,000 firms who, together with an unknown number of ‘non-professional’ landlords, had in total conducted around 50,000 transactions. Since then the market has been particularly buoyant so this number is expected to have increased significantly.  

Two stage approach to regulation 

Because of the number of sales going through each year, now estimated at 20,000 – 25,000 alone for 2009, it was clear that consumers were falling foul of predatory firms or unscrupulous individuals and the FSA moved quickly and implemented an interim regime which commenced on 1 July 2009.  

The FSA have now published the new rules and guidance and the full regime providing consumers with greater protection will come into force on 30 June 2010. 

So far however only around 80 firms have applied for FSA authorisation so the concern is, what has happened to the remaining 920 of the 1,000 that the OFT thought were operating in this market?  Are these too scared of the regulation, are they the cowboys that needed to be weeded out? 

Key points of the new rules 

The FSA has: 

• banned exploitative advertising and high-pressure sales techniques and prohibited the use of emotive terms like ‘fast sale’, ‘mortgage rescue’ and ‘cash quickly’ in promotional literature;
• introduced a 14 day cooling-off period to give consumers more time to consider their decision;
• banned cold calling and dropping promotional leaflets through letter boxes;
• ensured that consumers have a security of tenure for a minimum of five years;
• introduced an affordability and appropriateness check across all sales to ensure that the sale and rent back deal is right for the consumer.

How sale and rent back schemes affect the Council of Mortgage Lenders (CML) repossession figures  

The number of homes being sold by families to private landlords, under 'sale and rent back’ or ‘flash sales’ schemes are not taken into account in the quarterly house repossession figures issued by the CML.

With an estimated 50,000 homes already sold this way, and that was data from 15 months ago, then no one knows with any confidence how many were sold like this during 2009.

Because 'sale and rent back' was not an option back in 1991 when 76,000 homes were repossessed, the true repossession figure for 2009, without 'sale and rent back', could be 80,000 - 85,000 homes, arguably making it higher than those figures back in 1991.

What consumers need to do 

Consumers should ensure that they only deal with firms and individuals that are authorised and make themselves fully aware of the risks involved in sale and rent back schemes. From 30 June 2010 consumers can check if a firm is regulated and will have access to complaints procedures if they are. 

Under the new regime firms will need to meet certain conditions including a requirement for adequate resources and for the businesses to be run by fit and proper staff and in a respectable business manner. 

Consumers are encouraged to call 0300 500 5000 immediately if they are aware of sale and rent back firms who continue to trade without being authorised.

More information about SRB schemes can be found on the FSA’s Moneymadeclear Website.

Debtwizard comment

This can be found on Mike's blog Why 'sale and rent back' schemes needed regulating & Fraudsters target thousands of tax payers offering false rebates