In a major step towards increasing the accountability of large banks, Deutsche Bank has become the first financial company in the UK to be fined for “irresponsible” mortgage lending.

It has been fined £840,000 by the Financial Services Authority (FSA) and will have to pay £1.5m in compensation to up to nearly 8,000 borrowers.

The FSA said the bank had been guilty of “irresponsible lending practices and unfair treatment of customers in arrears”. Deutsche Bank says it will now contact the borrowers and arrange payments.

According to the FSA investigation, the bank’s staff failed to check if some customers would be able to afford their mortgage repayments if their loan lasted into retirement, didn’t offer cheaper mortgages to some customers who asked for self-certified mortgages and failed to check if some customers had considered where they would live if they planned to sell their homes to pay off their interest-only mortgages.

Deutsche bank’s home loans had been sold exclusively through mortgage brokers to people with a poor credit history, in 2006 and 2007. The FSA said 7,967 mortgages were arranged by the bank during this time, of which 4,211 are still on its books.

The FSA showed that when some of the mortgage customers fell into arrears, Deutsche Bank repeatedly hit some of them with unfair charges which bore no relation to the actual cost of administering their account.

Deutsche Bank stopped lending mortgages in 2008 but is the fourth lender since the autumn of 2009 to be fined by the FSA for mistreating mortgage customers in arrears.

However, it is the first time that the FSA has taken enforcement action against a firm for irresponsible mortgage lending.

A spokesman for the FSA said, “Firms which fail in their obligations to customers should expect not only a substantial fine but also they will have to pay back customers who have been disadvantaged by their failings”.

Following the identification of the issues raised by the FSA in an industry-wide review started in 2008, DB mortgages immediately commissioned a third-party review into its lending and arrears collection processes. Since then, they claim to have improved their oversight of mortgage servicing activities.

This is yet another example of the FSA showing its teeth far too late, after the damage has been done and after the new Government has pledged to abolish the organisation to find a more effective solution to financial services regulation.

This type of action, bringing irresponsible lenders to account and ensuring that others operating in the market notice, is precisely the kind of action that could have helped stave off the crisis a few years ago.

The Council of Mortgage Lenders (CML) has released figures showing that last year the number of homes being repossessed dropped by 24% to 36,300. Similarly, the number of people in arrears by 2.5% or more of their outstanding loans also fell last year, by 13% to 169,600.

The continued run of record low interest rates has helped many home owners who are experiencing financial difficulties. However, the CML has repeatedly warned that arrears and repossessions may rise this year.

The number of repossessions has been falling for more than a year and the 7,900 drop in the last quarter of 2010 was the fifth quarterly fall in a row.

The number of people facing payment pressures may increase in 2011 if the interest rates rise as expected. The CML (and this blog) will be monitoring developments closely, it is currently expected that the number of arrears and repossessions to be approximately 40,000 repossessions and 180,000 arrears cases as at the end of 2011.

As well as the possibility of higher interest rates, the CML pointed to other potential pressures on people struggling with their mortgages. With many people enduring pay freezes while the rate of inflation rises, and unemployment expected to increase due to government spending cuts, many experts believe some mortgage holders could quickly be tipped over the edge.

It cannot be emphasised enough that anyone who has problems or worries with their mortgage should contact their lender and seek advice at an early stage from Citizens Advice, Shelter, National Debtline or other local advice agencies.

Grant Shapps, the Housing Minister, pointed out that ‘there is help available and repossession should only ever be the very last resort. No one in financial difficulty should be embarrassed to seek help if they need it and worried homeowners should speak to their mortgage lender immediately.’