Millions of borrowers face unfair mortgage costs

The financial watchdog is investigating mortgage lenders for treating borrowers unfairly. But problems with penalty fines go much deeper...

According to Saturday's episode of BBC Radio 4's Money Box programme, the Financial Services Authority (FSA) is investigating four mortgage lenders for levying excessive penalties on mortgage borrowers.

These penalty charges apply when borrowers fall into arrears or fail to pay on time. However, the FSA is unhappy with the size of fines, as it believes that they exceed the underlying costs of dealing with home loans in arrears.

These fines are clearly unfair

Money Box found that Barclays charged mortgage borrowers in arrears a monthly fee of £40. Lloyds charged £31 for a follow-up arrears letter; Nationwide BS charged £95 for arrears counselling. What is doubly damning is that these charges build up even if borrowers have reached an agreement to repay any arrears.

I would argue that it is patently unfair to charge, say, £30+ for a computer-generated letter to a struggling homeowner, warning him (or her) that his mortgage is in arrears. Is this charge really an accurate reflection of the time and effort involved? Isn't it too much like kicking people when they're down -- especially when some lenders also apply penalty rates of interest to home loans in arrears?

If the FSA's inquiry finds that arrears charges do indeed outweigh the effort involved, then it can fine the offending lenders and order them to reduce or revoke these charges. However, while its investigation continues, the FSA refuses to name the four mortgage lenders under scrutiny. It says it will not name the offenders until it has taken enforcement action against them.

Treating customers fairly

While I agree that lenders should have the tools to take on fraudsters and persistent bad payers, I would strongly argue that these fines almost always outweigh the cost of dealing with genuine borrowers in arrears. Also, given that most borrowers in arrears are genuinely struggling, it seems unfair to punish the vulnerable alongside the feckless and fraudulent.

Thus, while lenders claim that these fines exist to tackle problem borrowers, I am sure that they are a source of handsome profits. If this is the case, then under the Unfair Terms in Consumer Contracts Regulations introduced in 1999, these penalty charges are unfair and, therefore, unenforceable.

In addition, the FSA's code of conduct requires lenders to treat customers fairly -- known by its market abbreviation of TCF. Alas, during more than two decades in financial services, I found that, by and large, companies pay only lip-service to the concept of TCF. In my long experience, lenders live by a quite different rule: PCF, or 'profits come first'!

Fine first, ask questions later

Alas, it's not just mortgage borrowers who face unfair fines, because the problem is much more widespread. Every year, millions of borrowers are hit by unfair fines for falling foul of the rules. For example, this latest news about the unfair treatment of mortgage reminds me of the long-running saga regarding the fines levied by personal current accounts.

Banks pocket around £3 billion a year from penalty charges imposed on customers who slip overdrawn or exceed their credit limit. Again, these fines plainly outweigh the cost of dealing with unapproved overdrafts. Thus, the Office of Fair Trading (OFT) is suing seven banks and Nationwide BS in order to reduce overdraft charges. Despite years of consumer complaints, this case is likely to last until 2010, during which time these firms continue to make rich pickings from unauthorised overdrafts. Read Banks give up defending penalty bank charges for more on this topic.

Big fines stop smaller fines

What can be done to tip the balance of fairness in favour of consumers? To me, the mortgage-arrears problem is just the latest of many failures of regulation. When it comes to reining in the worst practices of the banks and other lenders, our watchdogs seem to be slow to act. Then again, I believe that banks will only stop underhand behaviour when hit by large fines.

A classic example of a consumer victory came in the battle over payment protection insurance (PPI). Only when the FSA started to levy multi-million-pound fines and the Competition Commission slammed the PPI market did lenders decide to clean up this Augean stable. The banks' delaying tactics eventually cost them dearly, as the FSA banned lenders from selling PPI at the point of sale, curbing a £5 billion-a-year protection racket. Read The End Is Nigh For PPI to find out more about this.

Put fairness before fines

As the recession bites and unemployment soars, more and more homeowners are finding it hard to keep up their monthly mortgage repayments. Thus, the over-charging related to arrears is a problem set to cause distress to hundreds of thousands of homeowners in the years ahead.

Hence, I'd like to see the OFT or FSA take up arms on behalf of British borrowers. It's high time that regulators took steps to ban unfair penalties, charges and fines once and for all. Otherwise, tens of millions of consumers will lose out while lenders boost their profits by billions. In short, it's time for a British banking culture based on fairness, not fines.

Finally, if you're locked in an argument with a financial firm which refuses to play fair, then ask for a 'deadlock letter'. Once you have this, you can make a formal complaint the independent adjudicator the Financial Ombudsman Service (FOS). It's remarkable how reasonable lenders become when rebuked by the FOS!

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