A few simple words of warning

Lending Strategy April 2010

The Ministry of Justice has excelled in its approach to the way repossessions have been handled in recent years but it has missed a trick with its latest consultation paper on orders for sale.

I strongly recommend mortgage lenders to look at this and respond because, like it or not, the actions of consumer credit lenders affect the volume of repossessions as well as the public perception of mortgage lenders.

The reason for the MoJ’s consultation is sound and I’m sure most lenders would support it. But the premise is unfounded. This states that “public concerns about the use of charging orders in the consumer credit industry - and a lack of transparency surrounding the process - has indicated a particular need in relation to orders for sale”.

I don’t believe that anyone outside the financial services sector has more than the vaguest idea about what action the consumer credit industry could take, still less that “failure to pay your loan repayment could result in your home being repossessed”. This wording has clearly been chosen with care as it is a variation of what every lender is required to state every time it makes reference to a mortgage.

Before looking at some areas the MoJ should consider it’s worth looking at the scale of the problem.

According to the MoJ, there was a dramatic increase in charging orders leading up to 2008. Some 165,000 applications were made in 2008 - 25% higher than in 2007, 77% higher than in 2006 and over 1000% more than in 1998.

Numbers still rising
Around 70% of the applications between 2000 and 2007 resulted in orders, with this rising to around 80% in 2008.

Research conducted by the MoJ in early 2009 revealed another indicative rise in the number of orders of sale being granted.

A geographical concentration of cases showed that while most creditors were still content to secure charging orders without resorting to orders for sale a few were regularly applying for orders for sale that were granted.

To get a more robust understanding of the numbers involved, from June last year courts were asked to monitor the number of orders for sale being granted.

My issues with all this are twofold and linked. First, mortgage lenders are not on a level playing field with their consumer credit cousins with regard to transparency over the implications of the failure to repay loans.

Second, and perhaps more importantly, there is not the same duty of care placed on consumer credit lenders to ensure the facilities they offer do not push borrowers over the edge of their ability to repay, thus creating a chain reaction whereby mortgage lenders face arrears which could lead to repossessions through no fault of their own.

Addressing the second point first, our research shows the primary cause of repossession is excessive borrowing from other sources, second is redundancy, third is marital separation and fourth is interest rate rises. Of these, racking up debt from multiple sources is the only one that could conceivably be considered preventable.

With regard to the first point it is unacceptable that any lender that might seek an order of sale should not be compelled to use the same wording that applies to mortgage lenders.

This is not a new suggestion. Prior to the credit crunch we asked lenders whether unsecured loans should carry a repossession warning and 80% agreed.

Regarding the MoJ’s recommendation of imposing a credit threshold, my advice would be to prevent the event occurring in the first place.

We recently asked lenders if secondary lenders should be compelled to consider the affordability of all borrowing prior to offering credit. All said yes.

Respondents were then asked if they would welcome tighter regulation of credit card lenders, second charge mortgage firms, retail loan providers and unsecured loans companies. Again, all respondents said yes to credit card lenders, second charge mortgage providers and retail loan firms.

A consistent risk warning for all credit providers highlighting the risk of borrowers losing their homes if they fail to repay could be implemented now.

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