Lime Legal

Charged out

Published 12 March 2024

New measures to stop sub-prime lenders from unfairly penalising borrowers in mortgage arrears are currently under review. But with firms flagrantly ignoring the existing code, what chance is there that an extension of the rules will stamp out the practice? Bill Rashleigh and Tom Marshall investigate.

Sub-prime lenders are charging exorbitant fees to borrowers who fall into arrears – flouting the latest Financial Services Authority (FSA) measures designed to tackle mortgage fraud and protect homeowners from cowboy firms.

Evidence collected by ROOF shows that some lenders are still hitting borrowers with massive and disproportionate charges that push them further into arrears, increasing the likelihood they will be repossessed.

One borrower was taken to court by her sub-prime lender, Southern Pacific, for arrears of almost £2,000 – some three-quarters of which were charges that a judge ruled were unfairly imposed by the lender.

The fees, which included more than £1,000 for ‘litigation management’ and £250 for ‘arrears management’, were imposed even though the borrower was never more than two months’ behind on her payments. At the time of being taken to court, she was only £546 in arrears.

‘It is a travesty that these lenders don’t have to state the bare arrears figure in court and can bump up the numbers with all these charges,’ said Howard Springett, a Citizens Advice adviser who represented the borrower in court.

The credit rating agency Standard & Poors estimates that there are currently around 400,000 outstanding sub-prime mortgages in the UK. Its latest report on the sector found that in the three months to the end of September 2019, 28 per cent of sub-prime loans were in arrears – 18 per cent by more than 90 days – putting well over 100,000 homeowners at risk from swingeing charges.

‘The scale of this problem is massive. It is standard practice across the board with these types of firms and now that they are not doing new lending, they are penalising people who are locked in and can’t go anywhere else,’ said Springett.

In this instance, the judge threw out the case when it was revealed how much of the arrears were due to charges. However, Southern Pacific is still pursuing the borrower. The firm has offered to knock £350 off the charges as ‘a gesture of good will’, the borrower told ROOF. But Southern Pacific insists that the remainder of the charges – more than £1,000 – still stand despite the fact they breach long-standing FSA proposals on how lenders handle mortgage arrears.

One of the rules that firms in this sector have to abide by states that any charge imposed on a customer in arrears must be proportionate to the administrative cost of sending a letter or managing the arrears.

However, Southern Pacific charged £115 a month in ‘litigation management’ for 10 months, amounting to £1,150, before deciding to take the borrower to court.

‘I want to clear my debt, but I don’t feel that these charges are fair,’ the borrower said. ‘The lender has been atrocious to deal with and has never tried to talk to me or come to an arrangement about how to avoid court.’

In October last year, the FSA took action against another sub-prime lender, fining GMAC-RMC £2.8 million after an investigation found that it had acted unfairly in imposing punitive charges on borrowers in arrears. But debt advisers say that GMAC-RMC is far from the worst offender and other firms are not being pursued rigorously enough by the City watchdog.

‘I would put GMAC as a middle-tier offender. They are definitely not the worst,’ said Howard Springett. ‘The FSA was only able to get this result concluded because GMAC co-operated. If firms don’t play ball, everyone carries on suffering.’

A homelessness officer at Hartlepool borough council told ROOF that he had had problems with other sub-prime lenders. ‘We were given a speech by a top man at one sub-prime lender, who told us that they try and help people. But I had a call from a chap last week who had tried five times to come to some sort of arrangement, but that same lender was not prepared to negotiate a deal.’

The Southern Pacific case demonstrates the Kafkaesque journey that some borrowers have to embark on to reach agreement with their lender over managing arrears.

‘They told me that until they come to an agreement with me, they can’t stop the arrears charges,’ said the Southern Pacific borrower recently taken to court. ‘That was just after they told me that they couldn’t come to an agreement because I couldn’t afford to make any extra payments to clear my arrears.

‘They then told me that it’s not their policy to take extra money from people when they can’t afford to make extra payments. So I asked them why they are still putting on all the extra charges and that’s how it continued.’

In late January, the FSA set out new measures designed to ensure the fair treatment of borrowers (see top box). The measures will be consulted upon until the end of April. But given that firms are routinely flouting existing FSA rules (see bottom box), advisers believe that there is little chance that this latest round of measures will have any impact.

‘The FSA has said that it’s getting tougher but we still haven’t seen any more companies being fined. The GMAC-RMC case was only concluded so quickly because the firm cooperated and at the moment there is just a lot of talk,’ said Howard Springett.

Nicola Parmar, a money advice case worker in West Bromwich, says lenders are hugely unwilling to stop imposing charges.

‘When we write to lenders offering them payment, we ask if they will stop the charges now that the client has got money advice and there’s an arrangement to repay what they owe. They won’t do it, not even high street banks.’

According to Parmar, the most common fee for being in arrears is an administrative charge of £50 a month. Lenders also send out their own financial managers to visit the client and carry out a financial statement.

‘The problem is that these managers are not debt advisers or independent and the client is charged £100 plus for the visit,’ she said. ‘Lenders are meant to agree with the client that a visit is necessary, but sometimes they send them anyway and charge them for it.’

Other charges include fees for phone calls, letters and for switching a mortgage from repayment to interest only to reduce the monthly costs.

Ann Pittard, service director for strategic housing at Wakefield council said: ‘Lenders we deal with generally impose a monthly fee of between £40 and £50 while the client’s account is in arrears. In some cases, this is even when they have been advised that mortgage rescue is ongoing.’

She added that borrowers can also be doubly penalised by lenders who delay sending the local authority the information needed to proceed with mortgage rescue.

‘We have seen situations with lenders where although they have received letters from us confirming that mortgage rescue is ongoing – and asking them to suspend action – they still refer clients to their legal teams. This can mean more fees and additional costs appearing in the arrears notifications.’

Alex Bohdanowitcz, a Citizens Advice worker in Bradford, said that because these default charges are contractually allowed, it is hard to get lenders to stop imposing them once a client is in financial difficulty. He added that because interest rates also still accrue, it often means that any arrangement may prevent court action – but it doesn’t help reduce the arrears.

‘One client in Bradford had arrears of £318 on a 10-year secured loan and the bureau negotiated an agreement to pay £15 a month off the loan arrears,’ he said. ‘However despite several letters and complaints we were unable to get them to reduce the £20 a month default charge plus interest on the account.

‘Although he has maintained the agreement for the past year, his arrears have grown to £798 and our client is now looking into the possibility of mortgage rescue as the only option for keeping his house.’

Nor should lenders be adding these charges to the arrears balance. ‘In the agreement, it usually states that any charges should be tacked on to the mortgage balance – not the arrears balance – because it’s easier for the lender to get a court order when the arrears appear high, even when the reality is that it’s mainly charges,’ said Parmar.

The evidence shows that some lenders are clearly ignoring the FSA’s existing rules on arrears charges, raising question marks over its ability to enforce the new round of measures.

The only way the message will get through is if the watchdog cracks down, believes Howard Springett.‘The whip hand it’s got is that it could always withdraw these firms’ licence and say either you co-operate or we put you out of business.’

However, the problem lies in getting the balance right, he said. ‘The whole thing is a tight rope. They don’t want to overreact because they want to encourage more lending but they don’t want to encourage irresponsible lending. I don’t think anyone knows how this will evolve.’

As ROOF went to press, the Treasury Select Committee announced that it will be conducting a further inquiry on mortgage arrears following their inquiry last year. There is clearly much more to examine.