Further investigation into the treatment of customers by mortgage lenders reveals there are still significant weaknesses in the industry.

A study by the Financial Services Authority (FSA) claims some mortgage lenders are still treating their customers unfairly - particularly when handling arrears, repossessions and customers with damage credit histories.

The FSA are calling on mortgage firms to be more flexible with customers in areas that should consider the customer’s individual circumstances and to use court action only as a last resort.

The FSA are urging, once more, for mortgage lenders to step up their performance. The report claims the treatment of customers seeking mortgage guidance is unacceptable.

“As our data shows in these current market conditions more people are struggling to meet their mortgage payments and it is vital that firms treat them fairly,” says Lesley Titcomb, FSA Director responsible for the Mortgage Sector.

“This means paying attention to their individual circumstances and not repossessing their homes when there may be an alternative solution. Repossession has to be the last resort.”

A total of 13 mainstream and specialist lender brands (including impaired credit, buy-to-let, and self-certification, which account for a small portion of active and back books) were examined by the study. Mainstream lenders largely complied with FSA requirements and generally treated their customers fairly.

However specialist lenders were a cause for concern for the FSA. They claim that these lenders operated a ‘one size fits all' approach, focused too strongly on recovering arrears without reference to the borrower's circumstances and were too ready to take court action.

Specialist mortgage brokers were also deemed as having lower standards of systems and controls in place to control mortgage arrears handling, imposing changes in circumstances that could result in the unfair treatment of customers - and not exercising sufficient oversight of third parties contracted to carry out mortgage arrears and repossessions handling activities on behalf of lenders.

“We welcome the findings of the FSA’s research on lenders’ mortgage arrears and lending practices, which mirror CAB clients’ experience,” comments Sue Edwards Head of Consumer Policy at Citizens Advice.

Edwards explains that many borrowers have been taken to court without exploring other solutions.

“This could be avoided if lenders had acted in accordance with the FSA rules that govern arrears management practices,” adds Edwards.

“Bureaux also see cases where it appears that the lender had taken little or no account of the borrower’s ability to repay the mortgage. The borrowers got into mortgage arrears and faced repossession.”

According to Edwards England and Wales dealt with over 57,000 problems about mortgage and secured loan arrears, an 11 percent increase on the previous year. The same problems rose in the first two months of 2008 by 35 percent compared with the same period in 2007

“We call on the FSA to take urgent action on the findings of their research if the worst consequences of the deepening mortgage crisis are to be avoided.”

“We believe this should involve strengthening the rules on mortgage arrears and lending practices,” says Edwards.

In other news the FSA also found that 18 lending firms, many of which offer mortgages to consumers with impaired credit, were found not checking income where they should have had reason to doubt the amount declared.

An additional study followed up a past examination of 250 mortgage advice firms, where the first round of inspection revealed many flaws in the companies’ advice process. However second time round and most companies had made very few improvements.

As a result 7 small mortgage advisors have been referred to enforcement and 23 are being forced to review customer files, which were found to contain insufficient evidence to explain and support the advice given by the mortgage advisers.

The FSA also claims that mortgage fraud is a “serious problem and widespread problem” in the UK. In the past 12 months 17 individuals have already been banned or fined for mortgage fraud or attempts to process fraudulent mortgage applications. As a result the FSA will launch a new shceme to make it harder for criminals to deceive the system. Read more: Plans to Combat Mortgage Fraud