ID No: Genworth Financial. Response to European Commission Consultation on Responsible Lending and Borrowing in the EU

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1 ID No: Genworth Financial Building 11 Chiswick Park 566 Chiswick High Road London W4 5XR United Kingdom Response to European Commission Consultation on Responsible Lending and Borrowing in the EU August Introduction Genworth Financial Inc., (NYSE: GNW) is a leading public Fortune 500 global financial security company. Genworth has $114 billion in assets and employs approximately people in 25 countries. Its products and services help meet the investment, protection, retirement and lifestyle needs of over 15 million customers. Genworth operates through three segments: Retirement and Protection, International and U.S. Mortgage Insurance. Its products and services are offered through financial intermediaries, advisors, independent distributors and sales specialists. Genworth Financial, which traces its roots back to 1871, became a public company in 2004 and is headquartered in Richmond, Virginia.

2 In Europe, Genworth focuses on two product lines Lifestyle Protection insurance for individual consumers and Mortgage Insurance for lenders. These products play a valuable role in providing long-term stability for borrowers and lenders and expanding sustainable homeownership. Genworth s expertise gives a clear perspective on some of the most critical global economic trends, their impacts and how they might best be mitigated in the different EU Member States. Genworth Financial welcomes the opportunity to provide input into the public consultation on Responsible Lending and Borrowing in the EU on response to the document issued by the European Commission (EC) in June2009. Given the heterogeneity of European credit markets, we believe that the EC is facing extremely challenging goals and we expect some difficulties in achieving its aims. The next Section sets forth Genworth s responses to the questions posed in the document. 2. Questions and answers Section 2: Practices prior to the lending transaction Q1. Do you have evidence of misleading or unfair advertising or marketing practices with regard to mortgage and consumer credit? No comments. Q2. What are your views on the development of risk guidelines? We generally consider risk guidelines an effective tool to inform consumers on the implications of purchasing a credit product, provided the information given is objective, balanced and stays clear of value judgements or the promotion of certain products vs. others. Information provided to the consumer must be accurate and has to take into account potential risks he/she must face in a mid-term period. For example, the website of the Financial Services Authority in the UK 2

3 has a dedicated section ( with different guides on credit and insurance products that are helpful to consumers as they explain the implications and steps to purchase a credit product. Borrowers are also told what they have to do if they find themselves in difficulties to pay the instalments. Moreover, Genworth Financial has been running an innovative scheme in the US and Canada that we also hope to introduce in the UK and other parts of Europe to limit repossessions. The Homeowner Assistance Programme works with lenders and borrowers to find alternative solutions to foreclosure if a borrower is in financial difficulties. We provide borrowers with insight into how our loss mitigation process works, and we partner with lenders to provide educational material to customers who show signs of being in financial difficulties. By brokering payment solutions between the different parties involved, we have prevented foreclosures on more than $2 billion worth of mortgages in the US during the 12 months ending in March During this time we completed more than 15,000 successful mortgage workouts, which typically involve changes to the repayment plan or to the original terms of the loan. For a more detailed breakdown by state, please refer to our Foreclosure Prevention Scorecard at: We would also suggest an innovative concept whereby monthly credit card statements would include a regular prompted question such as Have you taken a conscious decision that you do/do not want to take out payment protection insurance to safeguard against future risk? Section 3: Business practices in the context of lending transactions Q3. In your view, are there certain (categories of) credit products that are inherently unsuitable for sale to retail borrowers? Would you welcome a set of standardised or certified products to be offered to consumers? 3

4 On the whole we do not believe that there are currently any categories of credit products on the market that should not be sold to retail customers provided borrowers are well informed and also accept some responsibility for the decisions they take. In our view, restrictions on products may stifle innovation or restrict the range of products that is available for different lifestyle situations, needs, attitudes to risk and financial literacy/sophistication. Having said this, Genworth Mortgage Insurance is promoting among its customers the use of the so-called Higher Standards for HLTV mortgages, as we support and advocate a return to prudent and responsible lending. These include a loan to value ratio not exceeding 95% and only in a few exceptional cases would we support lending above this up to 97%. Mortgages underwritten by these Higher Standards can be labelled as lower risk and could be easily identifiable for other purposes as securitisations. Q4. Do you consider that mortgage lenders and credit intermediaries should always perform creditworthiness and/or suitability assessments before granting consumer and mortgage loans? For mortgage credit, what are your views on the criteria to be used in assessing suitability such as loanto-income ratios or loan-to-value ratios? Yes, we do. As outlined above, we would caution against the return to irresponsible lending practices such as 100% LTV mortgages and the award of credit to consumers whose ability to repay has not been thoroughly assessed. Whenever we do business with lenders, including in the UK, we expect our clients to adhere to Genworth s Higher Standard in Mortgage Lending, which is attached in Annex I, and we continue promoting it as industry best practice in all markets in which we operate. Genworth s mortgage scoring data from lenders show that delinquency rates of loans over 80% LTV are almost double in cases where these higher standards have not been applied. We recommend that the EU: (i) Build on international experience and promote greater use of 4

5 Mortgage Insurance or other credit risk mitigants to manage risk in mortgage lending and support access to homes for first-time buyers; (ii) Promote a higher standard in mortgage lending, consisting of responsible lending criteria that include strict underwriting standards, transparency and standardisation to help the mortgage funding markets; and, (iii) Over time mandates the use of mortgage insurance for high-loanto-value mortgages over 80%, as in Canada. Insurance-based systems of mortgage finance have a precedent in Canada that has functioned well, even during the last 18 months of extraordinary global financial turmoil. As a result of mandatory mortgage insurance in Canada for high loan to value mortgages, growth in the housing market has not been fuelled by the sub-prime market. At its peak, the US sub-prime market accounted for roughly 22% of new originations compared to less than 5% in Canada. Levels of mortgage arrears in Canada remain at near historic lows, while they continue to rise in the US. In Canada, credit-worthy first-time buyers are still accessing the housing market, which in turn helps to soften any house price correction that maybe occurring due to the global credit crunch. By contrast, first-time buyers in the UK looking for a high loan to value (80% - 95%) mortgage are finding it very difficult to obtain such a mortgage despite having very good credit histories. In Canada, mortgage insurance is available for the purchase of new and existing homes as a primary residence, the purchase of second homes and the refinancing of existing mortgages. MI is widely available across the country, including rural and urban areas, and from small and large lenders alike. Loan premiums vary according to the LTV ratio, but are the same for all locations. Risk assessments are conducted to determine the applicants eligibility for a mortgage. For no additional premium, MI is portable from one property to another and transferable from one lender to another. 5

6 The federal government promotes mortgage financing through a guarantee programme for private mortgage insurers. The purpose of this programme is to allow private sector insurers to compete with the Canada Mortgage and Housing Corporation (CMHC), which is a federal Crown Corporation and has a privileged position under international financial rules. Under the government guarantee programme, private mortgage insurers pay an annual fee to the government and place money in a trust fund established to protect policyholders, i.e. lenders, in the event of bankruptcy. The current system of mandatory mortgage insurance delivers broad benefits for Canadian mortgage borrowers, for potential homebuyers, and for overall economic stability. Major benefits of the current system include risk pooling, geographic diversification, standardization of mortgage products, economies of scope and scale, and incentives for innovation and growth. These outcomes have positive implications for expanding homeownership, for limiting loan portfolio and systemic risk, and for maintaining a competitive environment in which regional and smaller lenders are active. The Canadian model of mortgage finance has proven to be stable and robust even in difficult economic circumstances, and we strongly recommend that governments and regulators consider implementing it in Europe. We recommend a model that follows the evolution of the Canadian mortgage market. It would give a central role to Government in the short term and would take advantage of the specialised capabilities that exist in the private sector. This solution is designed for sustainability by allowing the private sector to expand and transition the Government s role from direct provider to that of guarantor. The Canadian model provides a roadmap for the evolution of a similar system in the UK and other EU Member States. Q5. How should the lender or credit intermediary demonstrate or document the adequacy of the creditworthiness and suitability assessment? 6

7 We require a range of assessments to be undertaken, depending on the market in which we operate. We would like to have one set of lending criteria, but this is not realistic in view of the different market conditions across Europe. Generally speaking, assessing the creditworthiness and suitability of an applicant whether by lender branch or intermediary should follow the same process. A full credit search must be carried out for all applicants, on all addresses, covering a three-year period. Where an applicant has declared an address but there are no financial records registered on the credit bureau search, additional proof of residency should be obtained. If any undeclared credit appears on the credit bureau search, then this must be fully investigated. In the case of a mortgage, affordability should be calculated over a maximum term of 30 years or the actual term if shorter, and should be stress-tested by a minimum of 2% added to the interest rate on the loan. The interest rate used in the mortgage instalment should be the higher between the actual initial rate (regardless of whether it is fixed or variable) and the standard variable rate. The calculation should be based on a capital & interest repayment method, not interest only. Self-employed applicants should provide the last 24 months of audited accounts or tax returns as proof of income. In addition to proof of income, all applicants should provide their latest three months bank statements, which must then be used to confirm the payments to credit commitments and identify any that have not been declared on the application. When assessing income for salaried employees, the basic income plus a maximum of 50% of any additional income should be used providing this is a regular feature of the employment and has been proven. Q6. Do you think that these advice standards would be appropriate in an EU context? Are there others that should be considered? What would be the most appropriate means to introduce and enforce the application of advice standards? Please explain. We support the main advice requirements set out in the consultation 7

8 document (with particular reference to the UK, Denmark and Ireland) and feel that the following could be added: (i) To explain the financial implications of a variable rate loan; (ii) To explain risk events in life that a borrower may face (e.g. unemployment, permanent or temporary disability) that could compromise his/her ability to repay the debt, and the possible solutions which include payment protection insurance; and, (iii) To advise the borrower on how to proceed if he/she is unable to repay instalments: i.e. contact the lender as soon as possible in order to implement a work-out programme that could help to avoid debt spiralling out of control. Section 4: Responsible Borrowing Q7. Apart from a focus on financial education, are there any measures that could be taken to encourage responsible borrowing? We agree that responsible borrowing relies on the provision of correct, complete, precise and sufficient information from the borrower to the lender. What s more, the borrower cannot expect to put all the blame on the lender if he/she gets into difficulty. Financial education programmes, particularly when part of the national school curriculum, are vital if we want to have a future generation of financially literate people who are able to make informed choices in the marketplace. Such programmes should educate young people about basic saving, debt, insurance and pension products. The state-run education programmes can be complemented by private-sector initiatives. For example, in 2008 Genworth worked in collaboration with a large UK financial services provider to offer an additional service to customers who bought a payment protection insurance and were facing financial difficulties. The Credit Action ( helpline facility, provided by the National Money Education charity, is available to all customers as part of their PPI policy. It provides customers with the opportunity to review their finances on an unbiased, best-advice basis with an independent financial adviser at any time after they have taken out the policy. Section 5: Credit Intermediaries 8

9 Q8. Do you consider that the scope of the definition of Credit Intermediary as set out in the Consumer Credit Directive could also be applied to the mediation of credit not covered by that directive? Would it be appropriate to differentiate between full-time credit intermediaries and persons who offer credit intermediation on an incidental basis? Please explain why (not). No comments. Q9. Do you think policymakers should make distinctions between credit intermediaries in terms of the products they sell (mortgage, consumer credit, point of sale credit)? Should credit intermediaries be treated differently in terms of the status of their relationship with lenders (tied versus untied intermediaries)? Please explain your answer. We think they must be differentiated but not freed from the obligation of informing borrowers about products and their risk and lenders about the borrowers profile. For other forms of credit, we support the exemption made in the Consumer Credit Directive for credit intermediaries that act in an ancillary way. This is quite rightly, in our view - not dependent on the type of product that is sold. For non-mortgage credit we also support the fact that tied agents have to declare their relationship with the lender to the consumer under the Consumer Credit Directive. A similar provision ought to be in place for mortgage lending either at national or EU level. Q10. Could you give examples of cases of misconduct, mis-selling or any other instances of consumer detriment linked to credit intermediaries in your country? In recent years, Spanish brokers are known to have facilitated lenders underwriting of loans to clients that did not comply with minimum underwritten criteria and thus have promoted sub-prime practices. In the UK, we have come across the following examples of credit intermediaries malpractice: (i) Customers are being advised that they don t have to prove any 9

10 income or show any pay slip or bank statement when their income is found to be inadequate; (ii) Customers are directed towards websites advertising alternative proofs of income to falsify their real income e.g (iii) Customers are directed towards residential mortgages for buy-tolet purchases; and, (iv) Customers are advised to conceal addresses containing adverse credit bureau data or are directed to lenders which have specific blind spots in this respect. Q11. Does the regulatory patchwork for credit intermediaries present a problem, in your view? No comments. Q12. What would be the most appropriate way to address potential conflicts of interest, particularly with regard to fee/bonus/commission structures? Should any measures in this regard apply to bank client-facing staff as well as intermediaries? Although the Consumer Credit Directive and the Markets in Financial Instruments Directive already contain some provisions in this respect, we are not convinced that a one size fits all solution is the best way forward on this issue. There has to be a balance between the desire for transparency and the recognition that intermediaries need to receive adequate compensation for selling products. There is nothing fundamentally wrong with both fees and commissions being paid to an intermediary, provided the intermediary makes his status clear to the consumer at the time of the transaction and the fees are fully transparent. This is an essential requirement under the Consumer Credit Directive (Art. 21.) From our experience it is also unclear if commission disclosure actually influences consumer behaviour, as often consumers just focus on the total price of a product. Genworth does not feel it would be feasible to try to apply disclosure obligations to bank client facing 10

11 staff. Q13. What are your views on the registration and supervision of credit intermediaries? No comments. Q14. What are your views on prudential and professional requirements for credit intermediaries (such as minimum capital, professional indemnity insurance, educational or professional qualifications)? We firmly believe that credit intermediaries should be regulated and subject to minimum professional qualifications and indemnity insurance, although we would not want to see EU-wide, harmonised qualifications. This is best left to Member States to take into account differences in national education systems, cultures and the nature of financial markets. Introducing minimum capital/reserve requirements for intermediaries would be tricky, as many of them do not have a large turnover, are family-run and would probably regard it as a barrier of entry to the market if a larger though yet to be defined amount of capital was needed to operate as a business. Q15. How do you think the activities of credit intermediaries could be brought within existing complaints and out-of-court redress mechanisms? No comments. 3. Final Remarks Genworth appreciates the opportunity to submit comments to the Consultation on Responsible Lending and Borrowing in the EU and would welcome the chance to provide the European Commission with additional information and data to support the recommendations set forth in this submission. 4. Further information Please contact: Francesca Arcidiaco t: francesca.arcidiaco@genworth.com 11

12 Annex I. Higher Standard in Mortgage Lending 1. Responsible lending We support and advocate a return to prudent and responsible lending, with loan to value (LTV) not exceeding 95% of the property. Only in exceptional cases would we support lending up to 97%. HLTV loans entail an element of risk but are a fundamental part of the mortgage market and necessary to enable access to homeownership for first-time buyers. These borrowers tend to be young, educated and with good earning prospects but lack a large deposit they do not deserve to be locked out of homeownership. Mortgage insurance (MI) can bridge the gap between the needs of these consumers for credit and the concerns of lenders who want to transfer HLTV-related risk. MI providers put their capital at risk typically in a first loss position and therefore have the incentive and the historical expertise to assess the true nature and extent of the risk on HLTV mortgages. HLTV mortgages are prime, standard mortgages and are not the same as sub-prime mortgages (which in most definitions are made to borrowers with poor credit histories). Quality standards have been adopted in other markets such as Canada, where there is a statutory requirement for mortgage insurance on all loans exceeding the 80% LTV threshold. The transfer of default risk to mortgage insurance companies who require prudent underwriting and high quality standards acts as a stabiliser to the overall financial system and economy in Canada. 2. Transparency in underwriting Consistent and transparent standards are needed for establishing the two primary factors that determine any residential mortgage lending decision: the creditworthiness of the borrower and the value of the collateral against which the loan is being made. Sometimes the absence of credible and reliable information leads to inappropriate lending decisions and a poor allocation of capital to risk. Clarity and consistency in establishing the loan amount (L, numerator) and the value (V, denominator) in the loan-to-value (LTV) parameter are essential for delivering transparency and restoring confidence in the market. 12

13 3. Risk-related capital levels As a leading global provider of residential mortgage insurance, we have significant experience in several countries of the performance of high loan-to-value (HLTV) mortgage loans in good times and bad. While it is generally true that mortgage lending is one of the safest forms of lending, experience demonstrates that over the full economic cycle HLTV mortgage lending represents a significantly riskier portion of the mortgage lending market. It is therefore critical that higher levels of capital are held to reflect the increased risk, and that incentives exist to manage this risk properly. 13