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Second charge loans

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

Introduction

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 Steps before action.

Second charge mortgages granted before 21 March 2016 are still partially regulated under the Consumer Credit Act regime and subject to the rules outlined below.[1] These are sometimes called 'consumer credit back book agreements'.

Part 55 of the Civil Procedure Rules applies and regulates the procedure to follow in all possession proceedings for residential mortgages.

Before possession action can be taken

Second charge lenders 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.

From 21 March 2016, former FCA guidance on second charge lending[2] has been repealed and replaced by the new rules for second charge mortgage lenders and administrators which implement the MCOB rules and contain new requirements for second charge lending.

Consumer credit back book agreements

Where a second charge mortgage was executed before 21 March 2016 and was regulated by the Consumer Credit Act 1974 at the outset (ie it is a consumer credit back book agreement), since 1 October 2008, the lender must ensure additional steps have been followed before taking possession proceedings and must serve on the borrower:

  • annual statements in the prescribed form within 12 months of the start of the agreement and then at intervals of no more than 12 months[3]
  • notices of sums in arrears in the prescribed form within 14 days of two payments falling due. Notices must be served while the account remains in arrears at intervals of no more than six months.[4]

These rules do not apply to new arrears accrued after 21 March 2016.

Consequences of non-compliance

If a lender fails to comply with the above rules and to give the correct notices in the prescribed form, they will not be entitled to:

  • enforce the agreement against the borrower[5] (including applying and obtaining a possession order)[6]
  • claiming interests for the period of non-compliance.[7]

These provisions apply to loans for a fixed amount and not to running account credit, for example a secured overdraft.

Unfair relationships

In consumer credit back book agreements,[8] the borrower may be able to rely on the unfair relationship provisions in the Consumer Credit Act 1974 if the agreement is unfair because of:[9]

  • any of the terms of an agreement or a related agreement
  • the way the lender has exercised their rights under the agreement
  • any other thing done (or not done) by or on behalf of the lender.

The Supreme Court held that it is not possible to define what is an unfair relationship and that the factors to be considered to determine that questions include the bargaining positions of the parties, breaches of voluntary or regulatory codes, the borrower's sophistication or vulnerability and the hardship suffered.[10] Imposing a high rate of interest is not sufficient to render a relationship unfair.[11]

Improper execution

Consumer credit back book agreements are still governed by the rules on proper execution of a credit agreement. A borrower may have a technical defence if the detailed provisions of the Consumer Credit Act were not complied with, for example because the total amount of credit stated on the agreement include a charge for credit such as compulsory insurance. An agreement is improperly executed if it does not contain all the prescribed terms. The prescribed terms include:[12]

  • names and addresses of the parties, and a signature box
  • details of the security provided as part of the agreement
  • the amount of credit provided and the amount of any deposit or part payment
  • the rate of interest and whether it is variable
  • the total charge for credit including interest if it is fixed, along with broker fees, compulsory insurances, and amounts used to repay pre-existing arrears where this is a condition of the borrowing
  • where the agreement started on or after 31 May 2005 it must include a cancellation box, a statement of the APR and a separate signature box for Payment Protection Insurance.[13]

A lender seeking to enforce an improperly executed consumer credit back book agreement will require an order of the court permitting enforcement.[14] The court can consider prejudice to the borrower when deciding whether to permit enforcement.[15]

See Time orders for details of where they are available for consumer credit back book mortgages and other types of mortgage agreement.

[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] sch. 1, Consumer Credit (Information and Duration of Licences and Charges) Regulations 2007 SI 2007/1167.

[4] sch. 3, Consumer Credit (information and Duration of Licences and Charges) Regulations 2007 SI 2007/1167; s.86B Consumer Credit Act 1974.

[5] s.86D(3) Consumer Credit Act 1974.

[6] McGuffick v The Royal Bank of Scotland Plc [2009] EWHC 2386.

[7] s.86D(4) Consumer Credit Act 1974.

[8] art. 29(12) Mortgage Credit Directive Order 2015 SI 2015/910.

[9] s.140A Consumer Credit Act 1974.

[10] Plevin v Paragon Finance [2014] UKSC 61.

[11] Shaw v Nine Regions [2009] EWHC 3514 (QB).

[12] Consumer Credit (Agreements) Regulations 1983 SI 1983/1553.

[13] Consumer Credit (Agreements) (Amendments) Regulations 2004 SI 2004/1482.

[14] s.127(1) Consumer Credit Act 1974; 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).

[15] In the matter of London Scottish Finance Ltd (in administration) v Craig and others [2013] EWHC 4047 (Ch).

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