Responsible Lending

Below are some basic guidelines as to how lenders are governed to treat their customers.

All mortgage lending companies are governed by the Mortgage Conduct of Business (MCOB) and the following statement applies from the date at which the regulated mortgage contract is entered into or the further advance/re-mortgage is started.

According to the Mortgage Conduct of Business Rules (MCOB):
“…the lender should be able to show that before deciding to enter into a regulated mortgage contract with a customer or, on making a further advance on a regulated mortgage contract, account was taken of a customer’s ability to pay...”

A lender is obliged to deal fairly with any customer who:
(a) is in arrears on a regulated mortgage contract; or
(b) has a mortgage shortfall debt

The rules also state that the lender must:
“…put in place, and operate in accordance with, a written policy (agreed by its governing body) procedures for complying with its duty to deal fairly…”

The MCOB guidance further provides that:

“A lender should ensure that its written policy and procedures include:
(a) using reasonable efforts to reach an agreement with a customer over the method of repaying any payment shortfall or mortgage shortfall debt, in the case of the former having regard to the desirability of agreeing with the customer an alternative to taking possession of the property;
(b) liaising, if the customer makes arrangements for this, with a third party source of advice regarding the payment shortfall or mortgage shortfall debt;
(c) adopting a reasonable approach to the time over which to the time over which the payment shortfall or mortgage shortfall debt should be repaid, having regard to the need to establish, where feasible, a payment plan which is practical in terms of the circumstances of the customer;
(d) granting, unless it has good reason not to do so, a customer’s request for a change to:
the date on which the payment is due (providing it is within the same payment period); or
the method by which payment is made;
and giving the customer a written explanation of its reasons if it refuses the request;
(e) giving consideration, where no reasonable payment arrangement can be made, to the customer being allowed to remain in possession to effect a sale; and
(f) repossessing the property only where all other reasonable attempts to resolve the position have failed.”

The MCOB states that any breach of these procedures can be looked at as a contravention of the obligation to operate in accordance with the duty to deal fairly. This would therefore permit the borrowing customer to complain directly to the Financial Ombudsman Service (FOS).
O Please note that, according to the MCOB,
the duty to have an adopted policy to deal
with arrears and mortgage shortfall debts
‘does not oblige a [lender] to provide
customers with a copy of the written
policy and procedures.’
However, it is important to note that the lender does have an obligation to try and reach an agreement with a borrower over repayment of arrears.

According to MCOB rules, lenders are advised that customers:
(1) should be given a reasonable period of time to consider any proposals for payment that are put to them; in addition, and depending on the individual’s circumstances, a [lender] may wish to do one or more of the following with the agreement of the customer:
§ extend the term of the regulated mortgage contract; or
§ change the type of the regulated mortgage contract; or
§ defer payment of interest due on regulated mortgage contract or mortgage shortfall debt; or
§ treat the payment shortfall as if it was part of the original amount borrowed;
(2) should be given adequate information to understand the implications of any proposed agreement;

In terms of the requirement to adopt a reasonable approach as to the length of time a borrower should be given to clear arrears, MCOB guidance provides:

“The FSA takes the view that the determination of a reasonable repayment period will depend upon the individual circumstances. In appropriate cases this will mean that repayments are arranged over the remaining terms of the regulated mortgage contract…”

Record Keeping: lenders’ obligations
Lenders are obliged to make and retain an adequate record of their dealings with borrowers in arrears (or who have a mortgage shortfall debt) to enable it to show that it has complied with the obligations imposed by the MCOB.

Arrears: provision of information to the customer
A lender is required to provide a comprehensive package of information to a borrower in arrears. If a customer falls into arrears on a regulated mortgage contract, a lender must as soon as possible, and in any event within 15 business days of becoming aware of that fact, provide the customer with the following in a durable medium:
(1) the current FSA information sheet on mortgage arrears;
(2) a list of the due payments either missed or only paid in part;
(3) the total sum of the payment shortfall;
(4) the charges incurred as a result of the payment shortfall;
(5) the outstanding debt, excluding charges that may be added on redemption; and
(6) an indication of the nature (and where possible the level) of charges the customer is likely to incur unless the payment shortfall is cleared.

The lender must also make sure that the borrower is informed of the need to contact the local housing authority to establish whether he/she is eligible for local authority housing if the property is repossessed and ‘clearly state the action that will be taken with regard to repossession’.

Additional Charges
Many lenders add charges to borrowers in arrears. This includes charges such as monthly administrative charges, legal fees and interest.

The MCOB rules state that at least the borrower is made aware of the extent of the charging:

“Where an account is in arrears, and the payment shortfall or mortgage shortfall debt is attracting charges, a [lender] must provide the customer with a regular written statement (at least once a quarter) of the payments due, the actual payment shortfall, the charges incurred and the debt…”

The above statement would apply to all charges and fees levied directly as a result of the account falling into arrears. If interest is applied to the amount of the arrears, as it is applied to the rest of the mortgage, a lender does not need to send a written statement, unless other charges are also being made. If interest is applied to the amount of the arrears in a different manner to the rest of the mortgage then a written statement will be required.

Pressure on Customers
MCOB also seeks to protect borrowers from the more unpleasant forms of debt collection.

‘The rules state that a lender must not put pressure on a customer through excessive telephone calls or correspondence, or by contact at an unreasonable hour’.

A ‘reasonable hour’ will usually fall between 8am and 9pm. Putting pressure on a borrower includes the use of documents such as a court summons or other official document which intends to lead the borrower to believe that they have come from or have the authority of a court. It also includes the use of documents containing unfair, unclear or misleading information intended to put unnecessary force on the borrower into paying.

Complaints about the lender / Dispute Resolution
The Financial Services and Markets Act 2000 s.225 provides for the setting up of the FOS (Financial Services Ombudsman) to investigate complaints about lenders (although it also covers those involved in the administration of regulated mortgage contracts).

Complaints are to be determined according to what the Ombudsman considers to be ‘fair and reasonable in all the circumstances of the case’. The FSA Handbook sets out an elaborate Complaints Dispute Resolution procedure entitled ‘Dispute Resolution Complaints’.

The procedure provides that a complainant must first seek redress through the lender’s internal complaints procedure. The FOS cannot look into a complaint until either the lender has issued its final response to the complaint or eight weeks have elapsed from the date the complaint was received by the lender. If the FOS upholds a complaint it may either make a money award against the lender (to a maximum of £100,000) or a direction that the lender takes such steps in relation to the complaint as the FOS considers just and appropriate (whether or not a court could order those steps to be taken) or both. It remains to be seen to what extent the court will itself grant a stay in possession proceedings, under CPR 26.4 (2) (b), to allow negotiations to take place between the parties or to allow the FOS time to investigate a complaint.

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The FOS can also award a sum which reflects some or all of the cost reasonably incurred by the complainant (borrower) although ‘it is not anticipated that award of costs will be common since in most cases complainants should not need to have professional advisers to bring complaints to the Financial Ombudsman Service’. The FOS website can be found at www.financial-ombudsman.org.uk and the FOS Technical Advice Desk on 020-7964-1400.

In practice, mortgage possession actions can normally only be successfully defended by raising enough money to satisfy the lender or, failing that, persuading the court that it is right to exercise one of the statutory powers. In common with most debt cases, this involves minimising the borrower’s expenditures and maximising the borrower’s income.

Where the borrower is working, the question of income maximisation is largely one of ensuring that he or she is in receipt of any possible relevant additions to wages, income support, working tax credit, child tax credit, maintenance and child support payments, child benefit etc. If the borrower is unemployed, it is important to ensure that benefit payments are correct and complete. Any potential tax rebates should be claimed and any unfair dismissal, redundancy or discrimination claims considered.

It is also worth checking whether the borrowed is protected by any mortgage protection plan (where an insurance company has agreed to make part or all of the mortgage repayments for a limited period of time following the borrower becoming sick or unemployed).