Ben Allen, Head of Compliance
The MMR, launched in April 2014 brought something of a change of culture with regards to Decisions in Principle (DIPs). The focus on Financial Crime and the desire to improve business quality has led lenders to scrutinise DIPs far more than before. Yet some brokers are still treating DIPs like they did 10 years ago without realising they are exposing themselves to much higher risk so this Update is to remind everyone what lenders are looking for.
What is a DIP?
In concept, a Decision In Principle is simply an initial assessment made by the lender to gauge whether they would lend against the circumstances presented.
However in practice, what a DIP actually means has changed in the last few years. It is no longer something that can be obtained with minimal information; it is not a hook used to secure a potential client’s business; it is an area that is actively monitored by lenders.
Where does a DIP fit into the sales process?
The DIP is the first part of an Application.
The MMR highlighted the importance of knowing the customer but also knowing the lender. To know your customer, a full fact find must have been completed and to know the lender, full research must have been carried out.
In addition, the client must be made aware of which lender will be asked to provide a DIP and what product is likely to be available. Therefore a KFI must have been provided to evidence that full disclosure was made to the client.
A DIP can only be carried out after a fact find has been completed with all documents being collected from the client, research conducted, and a KFI provided the client.
But the client hasn’t found a property yet so why do I need to give a KFI which will probably change?
As a DIP is with a specific lender, there must be justifiable reason why that lender was chosen to do the DIP. This should be because they have the most suitable products available at that time. The KFI must therefore be provided to evidence this, even if it changes later on.
Do I need to get evidence before a DIP?
Yes—the requirement to Know Your Customer remains so you must be satisfied that the customer is who they say they are and that key information is correct.
The most obvious example is income—there must be evidence of income on file BEFORE a DIP is applied for because if this changes between DIP and application, it will invalidate the DIP and indicate poor compliance to the lender.
How would I deal with an estate agent who needs a DIP straight away?
The MMR brought a cultural change which needs to be communicated to estate agents. No one can apply for a DIP without going through this process so it is important to manage the expectations of estate agents.
What are the lenders looking for?
Lenders are trying to ensure they get good quality business whilst reducing exposure to financial crime. Analysing the DIP process is part of the those measures so lenders will look at the following:-
- Volume of DIPs;
- Regularity / frequency of DIPs;
- DIP to Application Ratio;
- Declined / Referred DIPs;
- Variance of information between DIP and Application;
- Lenders sharing DIP information.
So what happens if I have a DIP declined?
The lenders are using data obtained in the DIP process in a similar way to Key Performance Indicators. In other words, they are not looking at isolated cases particularly but are instead trying to identify trends. On that basis, having a DIP declined is not, in itself, a problem however getting lots of DIPs declined could indicate potential failings on behalf of the broker.
If a trend is identified, the implication is that the broker may be neglecting to carry out suitable due diligence of the customer, may not be researching the lender’s criteria properly, or may be trying to test the water with some fraudulent applications.
This could lead to a warning from the lender being recorded against your record. The lender may carry out a diligence assessment on your firm, or they may even move to stop individuals or whole firms placing business with that lender or group.
Are there any implications for the customer?
A DIP is you telling the lender about the client. If the information is not accurate it will reflect just as poorly on the client as it will on you as the broker so it must be as accurate as possible.
The most obvious implication is that the DIP will normally show on the client’s credit report so if a DIP is declined, it could lead to the client being disadvantaged in getting credit elsewhere. This is especially the case if there are multiple DIPs.
Alternatively, this could suggest to the lender that the client is potentially fraudulent. This could lead to the customer’s information being passed amongst financial institutions as part of the anti-financial crime procedures.
Summary
A DIP must not be obtained until…
- the fact find has been completed;
- all documents have been collected from the client;
- the research has been carried out;
- the recommendation has been made (KFI); and
- the client is informed what the implications of a DIP are.
Remember: You must use your best endeavours to get the fact find fully completed before putting the DIP to the lender, especially if the lender will conduct a credit search. The signature from the client is the authority to pass their personal details to the lender and also gives the permission to conduct the credit search. Without this, there could be grounds for complaint by the client.
The mortgage world has changed a lot over recent years so all brokers must make sure they understand and adhere to the requirements of the modern market. DIPs are a key part of this and failing to conduct them properly can lead to complaints, financial crime, panel removals and other sanctions.
