The Prudential Regulation Authority (PRA) has set out a range of options aimed at making it easier for mid-sized lenders to grow and compete in the UK mortgage market.
The PRA is now asking the industry for feedback on how to take these ideas forward.
The PRA has published a discussion paper looking at ways firms calculate capital requirements for residential mortgages under the internal ratings based (IRB) approach.
The aim is to make the rules simpler and speed up approval for lenders, especially when compared to the current system.
Currently, lenders using the IRB approach work out their own capital requirements for mortgage risk, while firms on the standardised approach use set capital requirements, which are usually higher.
The new paper focuses on two key IRB areas: loss given default (how much a lender expects to lose if a borrower defaults) and probability of default (how likely a borrower is to miss payments).
Lenders need to estimate both to get IRB approval.
For loss given default, the PRA will look at a “foundation IRB approach” where lenders would use figures set by the regulator, rather than working out their own.
This could make it much easier and quicker for mid-sized firms to get IRB permission.
The PRA is asking which types of firm this should apply to, if it should be different for buy-to-let (BTL) and owner-occupied mortgages, and if this method could be used for other retail loans.
Lenders would still need to estimate the probability of default, but the PRA is also considering changes to help with this process.
The regulator said it wants an open discussion with the industry about the costs and benefits of each option and is not making any final decisions yet.
Any changes will depend on feedback to the discussion paper.
David Bailey, executive director for prudential policy at the PRA, said: “Mortgages are one of the most important financial products in the country and among the biggest decisions people make about their finances.
“The options set out in this discussion paper could have a positive impact on competition and growth whilst maintaining an appropriate level of resilience, and result in more people getting access to the finance they need to buy a new home.
“Once we have feedback to this discussion paper, we will look to take forward the best options to support effective competition among UK lenders.”
