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Legal background

This content applies to England & Wales

Legal background to court action for mortgage arrears, including the lender's remedies, and the legislation under which possession can be taken.

A mortgage gives the lender a legal charge over the land, by which the lender may go into possession immediately, unless the mortgage provides otherwise. The mortgage almost always states that the lender may not take possession until the end of the 'term', or certain time, of the mortgage, provided that the borrower keeps to the mortgage conditions, in particular by making payments.

Lender's remedies

If the borrower defaults, the lender has a number of court remedies available, including the following:

  • repossession if the mortgage allows this (it almost always will). Where the property is residential and occupied, the lender will need a court order – this is the main remedy used by corporate lenders against borrowers in default of residential mortgages
  • foreclosure is a remedy by which a lender attempts to recover the balance of a loan from a borrower, who has stopped making payments to the lender, by forcing the sale of the property used as the collateral for the mortgage loan
  • sue for unpaid sums – usually the borrower fails to pay because s/he cannot, so a money claim is generally brought as part of a possession claim. However, there is no reason that a money claim on its own should not be brought, perhaps where the borrower is affluent and the property has little value.

Regulated Mortgage Contracts (RMCs)

The Financial Conduct Authority (FCA) regulates the way lenders deal with arrears and possession on Regulated Mortgage Contracts (RMCs). With effect from 21 March 2016, a contract for a loan is an RMC where it is:[1]

  • a contract where a lender provides credit to an individual consumer or her/his trustees
  • the loan is secured by way of a mortgage on land (including non-excluded second-charge and consumer buy-to-let mortgages) in the territory of European Economic Area (EEA), and
  • at least 40% of the premises (by area) will be occupied by the borrower, specified relatives of the borrower or beneficiaries under a trust of which the borrower is trustee.

A contract is not an RMC if it is:

  • a loan to a commercial borrower
  • a second-charge loan by an excluded credit union
  • an excluded second-charge bridging loan, or
  • an excluded consumer buy-to-let agreement.

Prior to 21 March 2016, only first charge mortgages were RMCs.

FCA Regulation

The rules are in the FCA Handbook, Mortgage Conduct of Business (MCOB).

MCOB 13: Arrears and possession outlines:

  • how lenders should deal with customers who are in arrears or in a sale shortfall
  • what information they should provide them with and within what time frame
  • how lenders should deal with repossessions.

MCOB 12: Charges states that any charges imposed on customers in arrears must be 'a reasonable estimate of the cost of the additional administration required' as a result of the arrears.[2]

For mortgages taken out before 31 October 2004, possession can be dealt with either under the MCOB or under the Council of Mortgage Lenders' statement of practice on arrears and possessions.

Administration of Justice Acts 1970 and 1973

Before 21 March 2016, many cases for possession of residential property fell under the provisions of the Administration of Justice Acts 1970 and 1973. These Acts applied where a mortgagee (ie the lender) claimed possession of a 'dwelling-house'.

A dwelling-house is a building or part of a building where someone lives, not necessarily the borrower. The fact that part of the property is used as a shop or for other business purposes does not prevent it from being a dwelling-house.[3]

On considering the application for possession, the court had limited powers to:

  • adjourn the proceedings
  • make a suspended or postponed possession order, or vary the terms of any existing order
  • stay enforcement of a possession order for such period as it considered reasonable.

These powers only arose if it appeared to the court that the borrower was likely to be able, within a reasonable period, to pay the sums due or to remedy the default.[4] Where there were arrears, the borrower was required to show that s/he could pay the arrears within a reasonable time, together with any further sum falling due during that period.[5] What was a reasonable time depended on the individual case, but the start point was the term of the mortgage.[6] It was not enough for the borrower to say that the mortgage could be repaid at the end of the term by sale of the property.[7] Where the borrower was unable to pay the sums due or remedy the default, the court could make an outright possession order or give the borrower time to sell the property.

The Administration of Justice Act provisions applied to a foreclosure case,[8] but not to loans regulated by the Consumer Credit Act 1974 (see below).[9]

From 21 March 2016 (and after the expiry of the six-month transitional period allowed) most residential mortgages are RMCs and therefore fall under the Consumer Credit Act 1974. The Administration of Justice provisions remain relevant only to non-RMC mortgages (see above).

Consumer Credit Act 1974

The Consumer Credit Act 1974 imposes various requirements regarding the form and content of a consumer credit agreement, and gives the courts a range of broad powers to deal with mortgage possession action. Loans secured on loans regulated by the Consumer Credit Act are:[10]

  • all loans under £15,000 taken out before 1 May 1998
  • all loans under £25,000 taken out on or after 1 May 1998,[11] except those which come within the exemptions defined in the Act
  • loans taken out on or after 6 April 2008 without financial limit apart from specified exemptions.

Loans which are exempt from regulation under the Consumer Credit Act 1974 are those which are not defined as 'consumer credit agreement' under the Act.[12]

On considering an application for possession after default on a loan regulated by the Consumer Credit Act 1974, and where the borrower is likely to be able to remedy the default, the court can:

  • adjourn the proceedings
  • make a suspended possession order
  • stay enforcement of a possession order
  • make a 'time order' (see Time Orders).

The court also has the power to make an order under the Consumer Credit Act 1974 where there is unfairness to the borrower resulting from the credit agreement. For more information see the page Second charge loans.

[1] Mortgage Credit Directive Order 2015 SI 2015/910, as amended; FCA, PERG 4.4.

[2] FCA, MCOB 12.4.1.

[3] s.39 Administration of Justice Act 1970.

[4] s.36 Administration of Justice Act 1970.

[5] s.8 Administration of Justice Act 1973.

[6] Cheltenham and Gloucester Building Society v Norgan [1996] 1 All ER 449, CA.

[7] Bristol and West Building Society v Ellis (1996) 75 P; CR 158, CA.

[8] s.8(3) Administration of Justice Act 1973

[9] s.38A Administration of Justice Act 1970.

[10] s.8 Consumer Credit Act 1974, as amended; Chapter 14A Financial Services and Markets Act 2000 (Regulated Activities) Order SI 2001/544, as amended by Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2013 SI 2013/1881 .

[11] Consumer Credit (Increase of Monetary Limits) (Amendment) Order 1998 SI 1998/996.

[12] ss.16 and following Consumer Credit Act 1974, as amended; .

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