Lenders steps before court action for mortgage arrears

The pre-action protocol and the steps the Financial Conduct Authority requires lenders to take before commencing court action.

This content applies to England & Wales

FCA rules before a claim is issued

The Financial Conduct Authority (FCA) Handbook, Mortgage Conduct of Business (MCOB) 13: Arrears and possessions, specifies that a regulated credit mortgage (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 Advice Service 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]

Second-charge mortgages to consumers are regulated by the FCA from 21 March 2016 in the same way as first charge mortgage contracts under MCOB rules, with the addition of some rules under the Consumer Credit Act 1974 which are retained (for example, prohibition on interest being increased on default under s.93, and the right to complete payment before the end of the mortgage term under s.94). There are various transitional provisions for this type of back book agreement.[8]

Buy-to-let mortgages to consumers (defined as 'persons who act for purposes which are outside their trade, business, or profession') have been subject to the FCA regulation from 21 March 2016.[9]

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 will cover CBTL business.

Pre-action protocol for mortgage possession

The aims of the Pre-action Protocol for Possession Claims based on Mortgage Arrears is 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

Communications 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. If the lender is aware that the borrower may have difficulties in reading or understanding the information provided, the lender should take reasonable steps to ensure that information is communicated in a way that the borrower can understand.

Possession claims as last resort

Starting a repossession claim 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.

Discussions between lender and borrower should consider the possibility of:

  • extending the term of the mortgage

  • changing the type of mortgage

  • deferring the payment of interest

  • capitalising the arrears, that is 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 regulated under the Consumer Credit Act 1974

  • unregulated mortgages

This protocol came into effect on 6 April 2015. It does not apply to buy-to-let mortgages. Where a potential claim includes a money and a possession claim, this protocol applies to both.

Steps under pre-action protocol

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

  • the required regulatory information sheet or the National Homelessness Advice Service (NHAS) leaflet on mortgage arrears

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

  • information on the amount of arrears, which should include:

    • the total amount of the arrears

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

    • whether interest or charges have been or will be added, and, where appropriate, details or an estimate of the interest or charges that may be payable

Further initial steps

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

  • 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

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

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

Postponing legal action

A lender must not consider starting a possession claim where the borrower can demonstrate that they have–

  • submitted a claim, and has provided all the evidence required to process the claim, to:

    • the Department for Works and Pensions (DWP) for Support for Mortgage Interest (SMI) or Universal Credit

    • an insurer under a mortgage payment protection policy, or

    • a participating local authority for support under a Mortgage Rescue Scheme, or other means of homelessness prevention support provided by the local authority

  • a reasonable expectation of eligibility for payment from the DWP or from an insurer or support from the local authority or welfare or charitable organisation such as the Veterans Welfare Scheme or Royal British Legion

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

  • difficulty in respect of affordability or another specific personal or financial difficulty, and requires time to seek free independent debt advice, or has a confirmed appointment with a debt adviser, and

  • a reasonable expectation, providing evidence where possible, of an improvement in their financial circumstances in the foreseeable future (for example, a new job or increased income from a lodger)

The lender should also consider postponing the starting of possession action where the borrower can demonstrate that they:

  • have made a genuine complaint to the Financial Ombudsman Service (FOS) regarding the potential possession claim

  • are taking 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.

Protocol non-compliance and sanctions

The lender and borrower may be required by the court to explain how they have complied with the protocol. From 1 October 2009, 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 may use its general powers to adjourn the hearing if the lender has not complied with the protocol or to allow for alternative dispute resolution.[10]

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:[11]

  • 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.[12]

Last updated: 22 March 2021

Footnotes

  • [1]

    FCA, MCOB 13.4.1 and 13.4.4.

  • [2]

    FCA, MCOB 13.5.3.

  • [3]

    FCA, MCOB 13.3.2A(1).

  • [4]

    FCA, MCOB 13.3.2A(1).

  • [5]

    FCA, MCOB 13.3.4B.

  • [6]

    FCA, MCOB 13.3.2A(6).

  • [7]

    FCA, MCOB 13.4.5(3).

  • [8]

    see Part 4 Mortgage Credit Directive Order 2015 SI 2015/910, as amended.

  • [9]

    see Part 3 Mortgage Credit Directive Order 2015 SI 2015/910, as amended.

  • [10]

    r. 3.1(2) for general powers, r.26.4 for alternative dispute resolution, Civil Procedure Rules SI 1998/3132 (as amended).

  • [11]

    s.55 Legal Aid, Sentencing and Punishment of Offenders Act 2012, in force since 1 October 2012 under art. 2(b) The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No. 2 and Specification of Commencement Date) Order 2012 SI 2012/2412.

  • [12]

    The Offers to Settle in Civil Proceedings Order 2013 SI 2013/93.