A subprime borrower is a person with a bad credit rating. This can range from someone who has missed a few credit card payments to someone who has been declared bankrupt. For banks and mortgage brokers, these types of customers are lucrative because the risk attached to them is justification for charging sky high interest rates. These customers are so lucrative that the market for them is worth 30 bn a year and many new companies are getting into the market. Figures show that the number of mortgages approved in May for new homes went from over 67,000 in April to more than 81,000 one month later in May. Analysts are guessing that those figures are expected to keep on rising.

Investment banks like Deutsche, West LB and Investec are some of the newer players in the subprime market while Lehman, GMAC and Merill Lynch have been in the game for some time.

So because the number of investment banks and brokers lending to these types of people has risen so sharply in recent times, with many new companies getting involved, the Financial Services Authority has its suspicions about what is happening in this part of the money-lending sector and is keeping a close eye on things to make sure that what is going on is all above board.

An FSA spokesperson says the area that the FSA is mostly looking at is whether mortgage advisers are taking the right steps when it comes to getting all the correct information for the customer. Gaining the correct information will help them to gauge whether or not that person is capable to keeping up the mortgage repayments.

We want to assess whether mortgage advisers are taking reasonable steps to ensure that personal recommendations to enter into sub prime mortgage products are appropriate to the needs and circumstances of consumers. We also want to ensure that mortgage advisers are gathering all information likely to be relevant for the purpose of establishing the suitability of these products.

Recently, the authority did some digging with respect to the area of subprime borrowers. It examined 31 small mortgage firms and 210 customers who had taken out loans with those companies. As a result, the FSA revealed that 60% of the firms had not obtained enough information from the customer to determine whether they could adequately pay back their mortgage and in 57% of cases, the sale involved consolidation of a customers existing debts.

Then there was also the 67% of cases where firms could not show that they had taken into account the customers previous situation with respect to creditors and debts. That is not to mention the fact that most (80%) couldnt justify how the mortgage product could meet the customers needs.

In fact, the FSA had three cases where brokers appear to have helped customers get a mortgage that they could not afford by inflating the applicants income on the application form. These firms have been referred to enforcement agencies for further investigation.

It acts as a strong reminder for brokers to keep a checklist for collecting the right information for mortgage applicants. That includes credit history, previous debts, existing mortgage arrangements and income and expenditure. These days most mortgage deals are sold through brokers so they have an important part to play.

The FSA says it will follow this issue up and further assess sales with these sorts of firms to make sure they have changed their procedures for gathering information. This will start with a review of mortgage brokers that are prepared to sell customers home loans who have a poor credit rating. The investigation begins this summer.