The City’s watchdog has cracked down on rogue mortgage brokers who advertise loans to borrowers with credit problems.

The Financial Services Authority revealed yesterday that it has ordered more than 200 brokers to withdraw or amend misleading advertising targeted at borrowers with impaired credit histories.

Four firms, which have not yet been named, will face further investigation by the FSA’s enforcement division.

The move comes as more and more high-profile mortgage lenders, many of which are backed by investment banks such as Merrill Lynch and Lehman Brothers, move into the lucrative sub-prime market, where profit margins are higher than on traditional prime loans.

The FSA inquiry found poor and misleading advertising in flyers, classified advertisements and regional newspapers.

Vernon Everitt, the FSA’s retail themes director, said: “Financial advertising has a massive influence on the decisions people make. So it must be clear, fair and not misleading. This is particularly the case in advertisements by mortgage brokers in the sub-prime market, where people are making one of the most important decisions of their lives.”

Rates on sub-prime loans are typically 2 or 3 per cent higher than on traditional residential loans, reaching double figures for some borrowers. The higher rates reflect the bigger risks involved in lending to borrowers with credit problems.

The FSA found that in some cases brokers sold sub-prime deals to people eligible for cheaper prime loans.

Ray Boulger, technical director of John Charcol, the mortgage broker, said: “The sub-prime sector is awash with dubious companies, peddling over-priced mortgages with exorbitant fees and excessive charges to those who can least afford them.

“These borrowers are often vulnerable because they often think their credit problem is bigger than it actually is and are just grateful to anyone who will offer them a loan.”

Brokers that specialise in sub-prime lending typically receive higher commission from lenders for selling higher-rate loans.

Commission rates on standard mortgages are about 3 per cent, compared with commission on heavy adverse deals of about 2 per cent.

Nick Gardner, of Chase De Vere Mortgage Management, another broker, said: “The higher the mortgage rate, the larger the commission from the lender. So it is in their interests to put the borrower on the highest possible rate. That kind of incentive seems wrong. It is easy to see how some unscruplous brokers will take advantage.”

A trade body representing mortgage brokers said that they were the victims of conflicting rules from regulators and that they had been unfairly singled out.

Chris Cumming, director of the Association of Mortgage Intermediaries, said: “Brokers face conflicting rules from the regulator and from the Office of Fair Trading and they are confused.

“We have issued a set of good practice notes to clarify the rules. We are disappointed that the FSA only mentions its work with brokers. The investigation into mortgage lenders should also be aired.”

Brokers' sins

Rogue brokers guilty of:

• Charging fees around 2 per cent higher than the “typical” rates quoted in advertisements
  
  
• Advertising fees of between £250 and £1,500, then charging £2,500
  
  
• Selling expensive sub-prime mortgages to borrowers who could qualify for a cheaper mainstream loan
  
  
• Switching borrowers already with a high-street lender to a rate 0.5 to 1 per cent higher from a sub-prime lender without offering any justification
  
  
• Poor record-keeping. Records do not explain why certain deals were offered
  
  
• Poor-quality advice

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