Clear
A mortgage adviser says
There is still a lot of legalese jargon in the small print
and many lenders still have plenty of scope for improvement.
Fair
The Director General of Fair Trading says
I will take legal action against any firm which fails
to ensure that its contracts with consumers do not contain unfair
terms.
The courts are prepared to criticise and overturn mortgage conditions
which they judge to fail these tests.
In February 2000 the Office
of Fair Trading announced that it will crack down on lenders
discriminating against captive borrowers - which could actually
reduce market flexibility.
In one instance the Office of Fair Trading reported:
Following action by the OFT, National Westminster Home Loans
(part of the NatWest Group) agreed to make significant reductions
in variable redemption charges on its fixed rate home loans. Some
borrowers previously faced charges that the Director General described
as 'ruinously high'. On existing fixed-rate mortgages NatWest agreed
to cap redemption charges at no more than five per cent of the sum
redeemed where the original loan was for a period of five years
or less. For loans that had had a longer fixed rate, the cap would
be seven per cent.
The bank also gave written assurances to the Director General
that it would not seek an early repayment charge at all in the event
of death or repossession. Cases of hardship would be dealt with
sympathetically. In addition, the bank agreed that maximum redemption
charges on all new loan agreements would be clearly expressed as
a cash amount.
NatWest had offered unusually long-term fixed rate loans at
a time when interest rates were higher than they are now. Borrowers
were attracted to this. But they did not appreciate that, if their
circumstances changed and they wished to redeem early, they could
face very substantial charges. Complaints to the OFT showed that
the method used by NatWest to calculate the charges was incomprehensible
to most borrowers. Borrowers entered into loans which if interest
rates fell would expose them to open-ended and substantial risk.
Nothing in the paperwork would have helped them to understand this.
Many faced charges of tens of thousands of pounds, especially on
longer-term loans, but their contracts gave an example showing a
redemption charge of only £300. The lack of transparency in these
contracts was considered to be a source of unfairness in its own
right under the Regulations.
Unfair mortgages and loans
What makes a mortgage or a loan unfair?
In October 2004 a Judge wrote off the debt of a couple who borrowed
£5,750 and found their debt balloon to £384,000.
The legal detail of the judgement is not clear from what we have
seen so far. Mr & Mrs Meadows quickly began to struggle to keep
up with payments, and the loan rose to 67 times its original amount
through late payment charges, interest and legal costs.
The judge did say that the interest rate of 34.9% was not unfair
in itself, but the interest was compounded on the arrears. We understand
that the loan agreement also had technical defects.
The judgement is not binding on other courts. London North Securities
are appealing. The hearing is expected between April and July 2005.
What should I do if I think my mortgage or loan is unfair?
This is a technical area. So if you are not absolutely sure of
your ground you should seek help. Free resources include
The FSA can now make authorised businesses promise to amend terms
on contracts which have been judged unfair under the Unfair Terms
in Consumer Contracts Regulations 1999.
Announcements have been made after cases were referred to the FSA
and then on to the OFT.
- Intelligent Finance were told that a term in the mortgage conditions
which allowed the to increase charges unilaterally for "valid"
reasons was unfair. The FSA also objected to a charge made on
customers when they exited the contract. They said it meant customers
were not free to terminate the deal.
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