Legal framework for mortgage arrears repossession

A mortgage gives the lender a legal charge over the land under which the lender may go into possession immediately, unless the mortgage agreement states otherwise. The mortgage almost always states that the lender may not take possession until the end of the 'term' of the mortgage, provided that the borrower keeps to the mortgage conditions, in particular by making payments. The term of the mortgage is the remaining years the borrower has left to pay before the loan ends. 

If the borrower defaults, the lender has a number of court remedies available, including issuing a claim for possession, foreclosure and bringing a money claim for arrears.

Issuing a claim for possession

Where the property is residential and occupied, the lender is required to obtain a court order to take possession. This is the main remedy used by lenders against borrowers in default with residential mortgages. The claim for possession is normally accompanied by a money claim for the balance of the mortgage. 

Foreclosure

Foreclosure is a remedy by which a lender attempts to recover the balance of a loan from a borrower in arrears by forcing the sale of the mortgaged property. This process is rarely used and may be prohibited by the mortgage agreement. 

Appointing a receiver

The mortgage lender can appoint a receiver to act as their agent under section 109 Law of Property Act 1925, often referred to as an LPA receiver. This is more common in buy to let mortgages. The receiver is entitled to receive rental payments if there is a tenant in the property. They can also bring possession proceedings against the tenants in the usual way. 

Issuing a money claim for arrears

The lender is entitled to bring a claim for money only. Normally, a money claim is brought as part of possession proceedings, but a lender may bring a money only claim if the sale of the mortgaged property will not settle the outstanding debt and the borrower has other valuable assets.

The Financial Conduct Authority (FCA) regulates all consumer mortgage lending, including 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 their trustees

• secured by way of a mortgage on land (including non-excluded second-charge and consumer buy-to-let mortgages), and

• at least 40 per cent of the premises (by area) is 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 limited company

• a second-charge loan by an excluded credit union

• an excluded second-charge bridging loan, or

• an excluded consumer buy-to-let agreement

Second charges that were exempt from Consumer Credit Act 1974 regulation before 21 March 2016 for any other reason than they were a RMC (article 60C(2) Regulated Activities Order 2001) did not become an RMC on 21 March 2016. Other exemptions could include the amount of credit, the nature of the agreement or the purpose of the loan. The FCA Perimeter Guidance Manual contains an explanation of Regulated Mortgage Contracts. 

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

The rules for RMCs are contained 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 default 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]

Mortgages taken out before 31 October 2004 are not RMCs. Instead, the rules for possession are contained in the Council of Mortgage Lenders' statement of practice on arrears and possessions. A remortgage or variation of the terms of the original loan after 31 October 2004 is likely to mean the mortgage is an RMC. 

Buy-to-let mortgages

Buy-to-let mortgages to consumers (defined as 'persons who act for purposes which are outside their trade, business, or profession') have been regulated by the FCA since 21 March 2016.[3]

Firms wishing to lend, administer, intermediate, arrange or provide advisory services in relation to consumer buy-to-let (CBTL) must be registered by the FCA and the Financial Ombudsman Service's jurisdiction covers CBTL business.

The courts powers to suspend possession on a residential mortgage are contained in the Administration of Justice Acts 1970 and 1973. Before 21 March 2016 these powers only applied to first mortgages and second charges that were not Consumer Credit Act Regulated Credit Agreements.

The Administration of Justice Acts 1970 and 1973 apply when a mortgage lender claims 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.[4]

On considering the claim for possession, the court has limited powers to:

• adjourn the proceedings

• make a suspended or postponed possession order

• stay enforcement of a possession order for such period as it considers reasonable

These powers only arise if it appears to the court that the borrower is likely to be able, within a reasonable period, to pay the sums due or to remedy the default.[5] Where there are arrears, the borrower is required to show that they can pay the arrears within a reasonable time, together with any further sum falling due during that period.[6]

The starting point for the court in determining a reasonable period for repayment of arrears is the remaining term of the loan.[7] A proposal that the mortgage can be repaid at the end of the term by sale of the property is not normally sufficient.[8] Where the borrower is unable to pay the sums due or remedy the default, the court can make an outright possession order or give the borrower time to sell the property.

The Administration of Justice Act provisions apply to a foreclosure case.[9]

Prior to 21 March 2016, the Administration of Justice Acts did not apply to loans regulated by the Consumer Credit Act 1974.[10] The Mortgage Credit Directive (MCD) 2015 took effect on 21 March 2016, transferring regulation of all residential mortgages to the FCA. The Consumer Credit Act 1974 applies in part to loans that were regulated at the time they were executed, and some provisions now apply to all Regulated Mortgage Contracts.

Mortgage lending is no longer regulated by the Consumer Credit Act (CCA) 1974. Agreements that were CCA regulated at the point of execution retain some of the provisions of the Act. The CCA 74 imposed various requirements regarding the form and content of a consumer credit agreement, and gave the courts additional powers to deal with mortgage possession action. Many of these additional powers now apply to all FCA Regulated Mortgage Contracts.

Loans regulated by the Consumer Credit Act are:[11]

• loans with an amount of credit up to £15,000 taken out before 1 May 1998

• loans with an amount of credit up to £25,000 taken out on or after 1 May 1998,[12]

• loans for any sum taken out on or after 6 April 2008

RMCs are exempt from the Consumer Credit Act regulation.[13] Other agreements may be exempt due to the:[14]

• high net worth of the borrower

• duration of the loan being less than 12 months

• loan being specified low interest loan