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Government moves into the arrears field

There are reports that chancellor Alistair Darling and housing minister Caroline Flint are set to meet mortgage lenders in a bid to urge them to do more to help struggling borrowers. This follows on from an earlier warning shot to lenders by the FSA which warned lenders that they need to treat customers fairly who are in arrears and that lenders should only take possession of a property as a last resort.

Although such warnings may be necessary for the recently emerged specialist lenders who did not exist in the early 1990’s they are not necessary for established lenders. Domestic mortgage lenders in their arrears collection procedures will often be reluctant to realise their security and take possession of a property, preferring to show flexibility to a borrower during a period of financial difficulty. Such a policy is desirable since the security is usually the borrower’s home.

It is also commercially sound since if a borrower can resume payments then the risk of loss on possession of the property is avoided, an outcome which is beneficial to both the lender and customers.

Such a policy is in line with government guidelines across the past decade and a half and the guiding principle of the Council of Mortgage Lenders, since mortgagees are encouraged to use possession as a last resort in order to reduce the number of mortgage related evictions. The FSA only needs to look back into past CML history to be assured that lenders will treat arrears customers fairly.

The CML produced a document called, “Statement of Practice on Handling Arrears and Possessions” in 1992 (around the time we left the ERM after another failed government policy) in the early days of the Mr John Major (a qualified banker) government when he had similar concerns to those of the FSA at the present time. Because of his concerns, the foundations for considering cases of hardship sympathetically were set. Later this principle was built into the CML code of Lending Practice (key commitment number 8) which required lenders to treat customers in financial difficulty “sympathetically and positively”. If CML self-regulatory schemes break down, recent legal precedent, in case law history, Cheltenham & Gloucester v Norgan (Court of Appeal – 1995) allows a borrower to spread the arrears over the whole of the term of a mortgage and ensures that lenders consider all possible solutions before possession.

No lender would willingly repossess a property while there remains a realistic possibility of ‘preserving’ the borrower as a customer, since it is only by maintaining the existence of the loan account that a lender is able to make long-term profit from an account, repossession terminates the lender’s opportunity to make a profit from that account.

No, it is clear to me that of the many issues the Government and FSA does have to issue warning shots about, established lenders treating customers in financial difficulty fairly is not one of them.


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