Lenders are being accused of taking unsecured debts and getting them secured against homes after a debtor misses payments of just a few hundred pounds.
Just last week I wrote in The secret clause in your mortgage contract about two ways lenders can take your unsecured debt and secure it against your property if you fail to meet your repayments. The lender can take your unsecured loan, credit card or overdraft and secure it with ease.
One of the methods I explained is for the lender to get what's called a charging order. The lender applies to the court to have a debt that is in arrears secured against your home, despite being marketed to you as unsecured.
New developments
The Office of Fair Trading has just announced that it has found problems in the way these orders are used and has imposed requirements on three lenders to improve their practices in this area: Alliance & Leicester Personal Finance Ltd, American Express Services Europe Ltd, and Welcome Financial Services Ltd.
Problems the OFT identified include failure to consider a customer's individual circumstances or proportionality before applying for a charging order, and not building adequate checks into the decision-making process.
Ray Watson, the Director of Consumer Credit at the OFT, said: 'Our investigation uncovered instances of charging orders being used to secure debts of less than £600. Lenders are entitled to use charging orders but must do so proportionately. Where we consider the use of charging orders to be unfair or oppressive we will take action to protect consumers.'
What they did wrong
Alliance & Leicester Personal Finance Ltd is now required to 'consider whether the steps it proposes to take are appropriate and reasonable', taking into account 'the extent to which such customer has responded to reasonable requests' and 'whether or not such customer has been making payments in accordance with a debt-repayment plan (whether or not ordered by the court)'.
The company must also include a note on case files explaining why it is reasonable to seek a charging order.
The other two lenders had largely similar requirements imposed on them. There are lessons here for those in deep debt: contact creditors to explain your circumstances before you miss payments (or as early as possible) and look to arrange a repayment plan that you can afford.
How common is this practice?
Pro charging order law firm, DWF LLP, wrote in a report that charging orders are at the 'absolute discretion of the District Judge...The judge will consider the debtor's position as well as that of other known creditors and interested parties.'
However, this conflicts with the hands-on experience of an experienced professional debt-collector. He told me a judge can't reject a charging order unless there is a technical irregularity, such as an improper application.
He also said that charging orders are common and becoming more so, which is an understatement. From 2000 to the middle of 2009, the issuance of charging orders rose more than 700%, according to Citizens Advice Bureau. Some sources are saying that we're now seeing 164,000 charging orders, up from 45,000 in 2005. A large part of this could be explained by both our deteriorating debt situation and greater desperation from the lenders to limit the damage of over-lending.
You won't necessarily lose your property
The better news is that charging orders only grant the creditor a piece of the property when it is sold. After getting a charging order lenders can go to court for another order for sale and possession, but the judge has more discretion to reject those or to set better terms for the debtors, and so they occur rather less frequently.
Other problems the OFT found
The Office of Fair Trading has been busy this week, imposing more requirements on these lenders and others in the industry.
Alliance & Leicester Personal Finance was told not to send letters threatening to get a court order when it has no intention of doing so. The same lender and Welcome Financial Services are forbidden from sending letters insisting customers pay more money than has been agreed by the court in a debt-repayment plan.
Welcome must also consider if its actions are proportionate before applying to repossess a hire-purchase vehicle. Welcome won't threaten to have repayments for a court-ordered debt-repayment plan increased unless there's been an improvement to the debtor's circumstances.
Amex and HFC Bank Ltd (part of the HSBC group) must stop levying fees, or claiming that they're entitled to, for referring debts to debt collectors, until they have amended their contracts to say they may do so. When they do this, they may charge only their reasonable costs – they can't make a profit – and they may not charge interest on the fees.
In addition, HFC was rebuked on late or missed payment charges and told that its correspondence with bad debtors must not be misleading. (To fight unfair charges, read Reclaim unfair charges and save thousands.)
The OFT also imposed requirements on debt-management company Aktiv Capital for chasing disputed debts before investigating the issues in dispute. It is also required the company to ensure its communications aren't threatening.
Last month, the OFT gave formal warnings to 129 debt-management companies for a wide variety of poor practices. As we reported in Dodgy debt clampdown is great news , the OFT investigated less than 148 firms in total, meaning it was very concerned with more than 87% of them.
If any firm breaches one of the OFT's requirements it could pay a fine of £50,000 and even have its credit licence revoked. The latter is unlikely and the former might not have a huge impact on every lender's practices, but if not then perhaps the worry of further bad press or of political interference will. The OFT says that all the lenders mentioned here have co-operated fully and made changes to address the problems raised.