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Second charge loans

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Requirements for lenders of second charge loans when taking possession action.

With effect from 21 March 2016, second charge mortgages are regulated in the same way as first charge mortgage contracts and are governed by the Mortgage Conduct of Business (MCOB) rules. From that date, second charge mortgage lenders are required to comply with Financial Conduct Authority (FCA) mortgage rules in areas such as affordable lending, advice, and dealing with payment difficulties – see the FCA's CP14/20 Implementing the Mortgage Credit Directive and the new regime for second charge mortgages for more information on this change. For information about how mortgage lenders should to deal with payment difficulties see Steps before action.

Second charge mortgages granted before 21 March 2016 (but there are various transitional provisions) are still regulated under the consumer credit regime and subject to the rules outlined below.[1]

Before possession action

Lenders of second charge loans must comply with the requirements of the Pre-action Protocol for Possession Claims based on Mortgage Arrears, which also applies to first charge loans. The protocol sets out steps that lenders and borrowers should take to ensure that court proceedings are the last resort when arrears arise. These are explained on the page Pre-action protocol for mortgage arrears.

Lenders are also expected to adhere to the Financial Conduct Authority (FCA) Guidance on second charge lending. This was published in July 2009 and superseded the preexisting OFT guidance on non-status lending. The guidance includes the following points:[2]

  • where a borrower falls behind by the equivalent of two periodic repayments, eg two months if payments are monthly, the lender should notify the borrower within 14 days and continue to do so at least every six months as long as the arrears continue
  • the lender's charges on arrears or default should not exceed the amount required to cover the lender's necessary costs. These charges should be set out clearly and fully as part of the credit agreement and in periodic statements
  • lenders should not harass the borrower, for example by making excessive or intimidatory telephone calls or contacting the borrower at unsociable hours
  • lenders should not send letters or other documents that are made to appear as if they derive from a court or which make unfounded or unrealistic threats of legal action. They should not make excessive use of statutory demands
  • where appropriate, lenders should act with forbearance to help the borrower remedy the situation, for example by freezing interest or other charges for a period or allowing deferred payment of arrears.

Possession action

Where a loan secured on a property is a regulated by the Consumer Credit Act 1974, the lender must meet the requirements of the Act when taking possession proceedings. See the page Legal background for more information on which loans are regulated by the Consumer Credit Act 1974. These loans are usually called second charge loans or second mortgages.

Part 55 of the Civil Procedure Rules applies (see The possession case for details) but there are additional requirements:

  • before possession proceedings can commence, a default notice must be issued by the lender in the prescribed form.[3] The notice must be on paper and not electronically produced, for example by e-mail[4]
  • the court has wide powers to assist the borrower and does not have to apply the test of whether the arrears can be paid within a reasonable period[5]
  • on hearing an application for possession, or on the application of either borrower or lender, the court can make a time order[6] (see the page on Time orders)
  • the court has the power to intervene if it deems that the relationship created by the loan agreement is unfair to the borrower.[7] This replaces the concept of extortionate credit bargain and has been in force from 5 April 2008. The powers of the court under the Consumer Credit Act where there is an unfair relationship apply to all regulated credit agreements apart from Regulated Mortgage Contracts (RMCs) (see the page Legal background for information on the regulation of RMCs). In a case where a borrower argued that the terms of his buy-to-let mortgage were unfair because they allowed the lender to appoint a receiver and sell the property in the event of him becoming unable to manage his affairs due to mental incapacity or if the mortgage went into arrears, the court held that the long history of arrears justified the lender's decision to sell following the borrower's compulsory detention in hospital for mental illness and the unfair relationship provision of the Consumer Credit Act was not engaged[8]
  • the borrower may have a technical defence if the detailed provisions of the Consumer Credit Act have not been complied with, eg improper execution of the agreement. Failure to state correctly the total charge for credit, for example by including an insurance premium as part of the total charge for credit, may invalidate the agreement, but the court now has discretion as to whether to enforce the agreement.[9] Where a lender and his group of companies had carried out regulated credit activity (ie provided loans to consumers) without a credit licence, the High Court ordered that any claim by the lender or any of his companies brought in any county court for either the recovery of money or the enforcement of charges over properties should be transferred to the Mercantile Court in London and be struck out. Trading in credit activities without a credit licence is a criminal offence and makes the related loans and charges unenforceable without special authorisation.[10]

[1] ss.1 Mortgage Credit Directive Order 2015 SI 2015/910, as amended - see Part 4 for the transitional provisions.

[2] Financial Conduct Authority Handbook: Consumer Credit Sourcebook CONC15 - Second Charge Lending.

[3] ss.87-88 Consumer Credit Act 1974; Consumer Credit (Enforcement, Default and Termination Notices) Regulations 1983 SI 1983/1561; and Consumer Credit (Enforcement, Default and Termination Notices) (Amendment) Regulations 2006 SI 2006/3094, which simply extends the minimum notice period from 7 to 14 days.

[4] Consumer Credit (Enforcement, Default and Termination Notices) (Amendment) Regulations 2004 SI 2004/3237.

[5] ss.133, 135 and 137 Consumer Credit Act 1974.

[6] s.129 Consumer Credit Act 1974 and s.129A, inserted by s.16 Consumer Credit Act 2006.

[7] s.19-20 Consumer Credit Act 2006, inserting ss.140A-140B Consumer Credit Act 1974, replacing ss.137-139 Consumer Credit Act 1974.

[8] Graves v Capital Home Loans Ltd [2014] EWCA Civ 1297.

[9] ss.60(1) and 127(3) Consumer Credit Act 1974; s.16 Consumer Credit Act 2006; Consumer Credit (Agreements) Regulations 1983 SI 1983/1553; London North Securities v Meadows and Meadows [2005] EWCA Civ 956;  (1) Barons Finance Ltd (2) Reddy Corp Ltd v Makanju [2013] EWHC 153 (QB).

[10] In the matters of Dharam Prakash Gopee, Barons Finance Ltd, Reddy Corp Ltd, Ghana Commercial Bunks; Ghana Commercial Finance Ltd; Finance Barons Bridging Finance; Barons Bridging 1 Ltd; Pangold Ltd; Pangold Properties Ltd; Agni Investments Ltd; Barons Finance 2 Ltd; Moneylink Finance Ltd; Speedy Bridging Finance, Euro Bridging Finance v Numerous Defendants [2014] EWHC 138 (QB).

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