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Background and the Importance of Plevin
The mis-selling of mortgages looks set to become the next cash cow for claims management firms following the payment protection insurance (PPI) scandal. PPI claims set to disappear, due to the six-year statute of limitations on claims in conjunction with the fact that lenders stopped offering PPI in 2008. The ground-breaking ruling in the recent Plevin v Paragon Personal Finance Ltd could have far reaching ramifications as Paragon was forced to reopen its mortgage contract despite being held to have acted lawfully, although unfairly. The focus was on s140A of the Consumer Credit Act, which allows the court to reopen a contract where the terms of an agreement are deemed unfair if: any of the terms are deemed unfair; the creditor enforced his rights unfairly; or anything done by, or on behalf of, the creditor is unfair. In the case itself the relationship was deemed unfair due to the failure to disclose how much commission was being awarded to the broker; such a significant amount that the customer would have reconsidered the plan if they were aware of the figure.
This article will address the key aspects of mortgages that may cause the court or the financial ombudsman to reopen an agreement, or force the lender or broker to pay damages to the aggrieved customer. Furthermore, the article will then suggest methods by which these failures can be avoided or overcome in the future.
Suitability of the Mortgage
Suitability is most certainly one of the key criteria in determining whether a mortgage has been mis-sold. When assessing whether a loan is suitable for the mortgagor, brokers and lenders alike must consider a range of criteria including the affordability of the mortgage. In Emptage v Financial Services Compensation Scheme Ltd the claimant met with their broker with the intention of restructuring their current £40000, ten-year mortgage into a more affordable package despite the fact they did not have any other assets constraining cash flow. During the course of their discussions, Emptage was persuaded to take a fifteen year, £110000 interest-only mortgage that would allow her to invest in a property in Spain. When the Spanish market collapsed, Emptage was left with no option but to sell her home to repay the mortgage and, therefore, sought redress from the FSA as the brokerage had also collapsed. The Court of Appeal held that Emptage’s problems flowed from the negligent advice of the broker in respect of the suitability of the mortgage. The compensation, therefore, needed to take into account the loss caused by the occurrence of the risk of the claimant being unable to repay the loan at maturity; the whole loan.
Poor Quality of Advice
Lenders and brokers must ensure that any advice given to customers during the pre-contractual discussions is accurate as the client may seek to rely on it, leading to the potential mis-selling of mortgages. The Financial Conduct Authority (FCA) is the watchdog for such activity and recently fined RBS-Natwest nearly £15million due to the scale of their failures; it was found that just 1% of customers were given ‘appropriate’ advice by sales staff. Improper advice can be in relation to the assessment of a customer’s budget or their debts, to the length of the mortgage and even predictions of interest rates over the course of the loan. Indeed, a mortgage adviser giving personal views on the future movement of interest rates is deemed “highly inappropriate” by the FCA.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11057906/RBS-fined-14.5m-over-mortgage-selling.html
Unsuitable Lender
Brokers have come under fire for referring clients onto schemes that do not best suit the client. An unnamed equity release company advised Mr and Mrs C that they should take a lifetime mortgage as the most suitable means of raising the £25000 they wanted, despite being aware of the fact that Mr C had a pension that gave him the option of paying the money as a tax-free lump sum. Mr C had also stressed that he wanted to be able to pay the loan back early without too large a penalty – when he tried to do so he was faced with a total bill of £40000 due to a very high interest rate and exit penalty. The ombudsman held that the equity release company should pay the difference between the £40000 and the cost that would have materialised had they used the lump sum, as well as refunding the fees and charges the company had charged them to set up the mortgage.
Interest-Only Mortgages
FCA predictions forecast that only just over half of the 600k interest-only mortgages set to mature before 2020, will be settled. According to the same report, 13% of borrowers were not aware of the terms at the moment they took the loan but the chief financial ombudsman does not believe that this is a case of mis-selling reminiscent of the PPI scandal. More importantly lenders failed to ensure customers set a plan for repayment of the bulk sum, rather than on the mis-selling of the actual interest-only mortgage. An ombudsman spokesman told the Guardian that it has received so few complaints about interest-only loans that it doesn’t even record them separately.
Lending Into Retirement
The Mortgage Market Review came into force late-April 2014 and has led to sweeping changes in the mentality of most lenders when it comes to lending into retirement. Often overlooked pre-recession, lenders are now fully responsible for ensuring the affordability of their loans and so the higher risk mortgages that continue to be paid post-retirement are under review due to their riskier nature. Mr and Mrs E took out a 25-year endowment mortgage running three years past their retirement despite the fact that neither had savings or pension arrangements. Not only did their policy risk their financial stability when they were both out of work but it was a more expensive policy than a 22-year repayment mortgage, which was more affordable and would not have run into their retirement. Therefore, the ombudsman held that they should be compensated the difference.