Lenders steps before court action for mortgage arrears

The Financial Conduct Authority (FCA) regulates most residential mortgages.

The FCA Handbook, Mortgage Conduct of Business (MCOB) 13: Arrears and possessions, specifies that a regulated mortgage contract (RMC) lender must provide a customer who has fallen into arrears with the following within 15 days in writing or another durable medium[1]:

• full details of the missed payments,

• any charges incurred as a result of the shortfall,

• the total amount due and the charges that will be incurred if the shortfall is not cleared, as well as

• a copy of the current Money Helper information sheet Problems paying your mortgage

In addition, lenders must:

• not put pressure on a customer through excessive telephone calls or correspondence

• not contact the borrower at an unreasonable hour[2] (a reasonable hour will usually be between 8am and 9pm)

• make reasonable efforts to reach an agreement with a customer over the method of repaying any payment shortfall or sale shortfall[3]

• allow a reasonable time for repayment of the shortfall, establishing a payment plan that is feasible given the circumstances of the customer[4]

• make the customer aware of any relevant government schemes to assist borrowers in payment difficulties[5]

• not repossess the property unless all other reasonable attempts to resolve the situation have failed[6]

• make the customer aware of the steps that will be taken in relation to repossession[7]

12-month grace period for possession action

HM Treasury and the FCA published a Mortgage Charter that sets out protections for mortgage borrowers facing financial difficulty due to inflation.

Signatories to the Charter have agreed that from 26th June 2023, a borrower will not be forced to leave their home without their consent unless in exceptional circumstances. The Charter has been signed by 31 mortgage lenders, representing 85 percent of the mortgage market.

This grace period also applies where a possession order has been granted. The courts might not be willing to delay a possession order or the execution of a warrant based on a voluntary charter. Borrowers whose lender starts a claim or applies for a warrant in breach of its agreement with HM Treasury can complain to the Financial Ombudsman Service.

Read more about how to complain about a bank or lender on Shelter Legal.

The aims of the Pre-action Protocol for Possession Claims based on Mortgage Arrears are to:

• ensure the lender and borrower act fairly and reasonably with each other in resolving any matters concerning arrears

• encourage greater pre-action contact in order to reach an agreement out of court

• enable efficient use of the court's time and resources

• encourage lenders to check who is in occupation of the property before issuing possession proceedings

Communication and provision of information

The protocol requires that any communications and provision of information between the lender and the borrower should be made in a way that is clear, fair, and not misleading. The lender should take reasonable steps to provide information in a way that the borrower can understand if it is aware that the borrower may have difficulties in reading or understanding information.

Possession claims as a last resort

Starting a possession claim in court should be a lender's last resort. Possession proceedings must not normally be started unless all other reasonable attempts to resolve the situation have failed.

The lender should consider:

• extending the term of the mortgage

• changing the type of mortgage

• deferring the payment of interest

• capitalising the arrears (adding the arrears to the outstanding mortgage)

• using any government forbearance initiatives in which the lender participates

Scope of the pre-action protocol

The protocol applies to arrears on:

• first charge residential mortgages and home purchase plans regulated by the Financial Conduct Authority

• second charge mortgages over residential property and other secured loans originally regulated under the Consumer Credit Act 1974

• unregulated mortgages

This protocol does not apply to buy-to-let mortgages. Where a potential claim includes a claim for money and a claim for possession, this protocol applies to both.

Where a borrower falls into arrears, the lender must provide the borrower with:

• the required regulatory information sheet or the guide Are you worried about your mortgage

• information on the current monthly instalments and the amounts paid for the last two years

The lender must also give the borrower information about the amount of arrears, which should include:

• the total amount of the arrears

• the total outstanding on the mortgage or the home purchase plan, and

• whether interest or charges have been or will be added

Other steps the lender must take

The other steps a lender should take prior to issuing a claim for possession include to:

• advise the borrower to contact the local authority housing department

• refer the borrower to appropriate sources of independent debt advice when necessary

• take steps to discuss the reason the borrower is in arrears, whether the situation is temporary or long term, and their financial circumstances

• consider reasonable requests to vary the regular date of payment or method of payment

• discuss proposals for repayments of the arrears, give reasons in writing within 10 days if a borrower's proposals are not accepted, and allow a borrower reasonable time to consider any proposal made by the lender

• if the borrower does not keep to any agreement, the lender should give them 15 working days' notice in writing of its intention to issue a claim for possession

Tenants in occupation

The lender should seek information about whether the property is occupied by an authorised tenant.

If at the possession hearing there is an authorised tenant in occupation of the property, the court will consider whether to:

• issue further directions

• adjourn the possession claim until possession of the property is recovered from the tenant, or

• make a possession order conditional upon the tenant's right of occupation

Read more about authorised and unauthorised tenants in Tenant's rights when a landlord is repossessed.

When the lender should postpone court action

A lender should not start a possession claim where the borrower can demonstrate that they have submitted a claim for DWP benefits, or insurance, or to a local authority or welfare association, and has:

• provided all the evidence required to process the claim

• a reasonable expectation of eligibility for payment

• an ability to pay a mortgage instalment not covered by the claim

The lender should allow the borrower time to get advice about a debt problem.

The lender should postpone the claim if the borrower can show their financial situation is likely to improve in the foreseeable future.

The lender should also consider postponing the starting of possession action where the borrower can demonstrate that they have taken active steps to market the property at an appropriate price.

Postponement pending voluntary sale

If the lender postpones a possession claim pending the sale of the property the borrower should provide the lender with:

• details of offers received

• copy of the particulars of sale

• copy of the energy performance certificate (EPC) or proof that one has been commissioned

• details of their estate agent and conveyancer

The borrower should also authorise the estate agent and conveyancer to communicate with the lender regarding the progress of any sale. If the lender refuses to postpone legal action it should give its reasons at least five working days before it starts proceedings.

Postponement to allow a complaint to the Financial Ombudsman

The lender must consider whether to postpone the start of a possession claim where the borrower has made a genuine complaint to the Financial Ombudsman Service (FOS) about the potential possession claim.

Where the lender does not intend to wait for the FOS decision it must give the borrower its reasons in writing.

Find out more about how to complain about a bank or lender on Shelter Legal.

The court could ask the lender and borrower to explain how they have complied with the protocol. Lenders must demonstrate compliance with the protocol by presenting two copies of Form N123 - Mortgage pre-action protocol checklist at the court hearing.

Adjournment

There are no explicit sanctions for non-compliance but the court can use its general powers to adjourn the hearing if the lender has not complied with the protocol or to allow for alternative dispute resolution.[8]

Cost orders

In cases of refusals of offers to settle, the court can order the defendant to pay the claimant an additional amount of award, if:[9]

• the defendant did not accept the claimant's offer to settle, and

• the court subsequently gave judgment for the claimant which was at least as advantageous as the offer

Different prescribed amounts apply depending on whether the proceedings involve money claims only, both money and non-money claims, or non-money claims only.[10]