EVIDENCE OF CONSUMER DAMAGE REPORTED DURING
TREASURY MORTGAGE CONSULTATION
This note summarises the main areas of perceived or actual damage,
or detriment, reported in responses to the Treasury discussion document
on the regulation of mortgages published in July 1999.
The number of formal complaints about mortgages to the Banking and
Building Society Ombudsmen is small, about 6,000 in 1998 - 1999. This
does not take account of the complaints dealt with through firms'
internal procedures. But there are many more dissatisfied customers
than those figures show, although this is a small proportion of the
nearly 11 million mortgages currently on the books.
The Treasury distinguished between damage from unforeseen personal
events (eg family breakdown), and economic factors (eg property prices,
interest rates) which may lead customers to want to change products
they have chosen; and preventable problems such as mal-practice or
mis-selling, and poor or misleading information. This note concentrates
on the latter areas.
In general terms, the detriment fell into four distinct areas:
i) poor or mis-leading information, lack of transparency;
ii) product features, requirements, and lenders' systems;
iii) regulatory gaps; and
iv) treatment of arrears.
The main examples of damage concerned:
a) payment illustrations and annual percentage rate calculations
(APRs), especially in advertising literature. The law on APRs permits
different approaches and lenders have taken advantage of this by quoting
low introductory rates and applying these to the full term of the
mortgage. New APR regulations will come into force in April, which
will standardise and make the full costs clear;
b) lack of transparency of fees, for example, valuation, reservation,
and arrangement fees, which may only come into play once a customer
has signed up;
c) lack of transparency of costs or commissions associated with
related products, such as linked insurance;
d) advertising literature and contracts, where product restrictions,
complex redemption charge calculations, and other aspects of the mortgage
are included in the small print and not explained to borrowers;
e) advisers who may provide information only on a limited range
of products, and may push higher commission products;
f) the general difficulty in making like for like price comparisons
II) Product features
The main examples of consumer damage were:
a) compulsory purchase of associated insurance products (including
single premium accident, sickness and unemployment insurance where
commission is paid up front) which are more expensive for the consumer
than if they were to be allowed to shop around;
b) prohibitive early repayment charges;
c) tie and lock-in periods, particularly after the end of a fixed
d) mortgage indemnity guarantees for high loan to value customers.
Not only do customers have to pay an expensive insurance premium against
default, which only benefits the lender, but they are still liable
to repay the insurance company for the difference in sale price, fees
and charges, and what the borrower owes.
e) annual calculation of interest, where borrowers pay interest
on capital they have already repaid;
f) punitive interest rates for minor repayment breaches; and
g) delays in passing on movements in bank base rates, and in areas
of the non-status lending market, not reducing interest rates at all
in some supposedly variable rate mortgages.
III) Regulatory gaps
Current regulation is set out as follows:
a) The Office of Fair Trading (OFT) regulates all lenders in relation
to advertisements and extortionate credit bargains and licences some
lenders under the Consumer Credit Act, (some responses questioned
the apparent lack of a rational basis for the £25,000 limit under
b) A different part of OFT deals with unfair contract terms and
may take legal action as necessary.
c) The Financial Services Authority (FSA) regulates the sale of
investment vehicles for repayment of interest only mortgages.
d) Many lenders have to be authorised by FSA because they are involved
in selling other investment products.
Voluntary (or self) regulation
e) OFT has set guidelines for those firms involved in non-status
lending. (Although this is voluntary, persistently going against the
guidelines could call into question a firm's fitness to hold a consumer
f) The Association of British Insurers (ABI) code of practice covers
the sale of life insurance products.
g) The Council of Mortgage Lenders (CML) Mortgage Code regulates
the selling, and in some areas, the on-going relationship between
lenders and borrowers.
h) Redress is provided by the Ombudsmen, and other arbitration systems
provided under the Mortgage Code.
IV) Treatment of arrears
Examples of questionable practices include:
a) a failure to provide promptly (or at all), to both borrowers
and the courts, clear and accurate breakdowns of the total amount
owed, including details of payments due, payments made, interest added,
other charges, balance outstanding and arrears;
b) lenders failing to name an individual with whom the borrower
(or their representative) could discuss the position face to face,
(and who would have the full facts at their fingertips) other than
relying on impersonal central call centres;
c) additional administration charges (sometimes without explanation
to the borrower) on top of the arrears; these may be both out of all
proportion to the debt and, where agreed, repayments are used to pay
off charges rather than reducing arrears;
d) lenders taking court action simply to confirm repayment agreements
reached between the lender and the borrower, sometimes even where
the repayments have been maintained;
e) lenders failing to take account of a court judgement (the Norgan
judgement) which states that lenders should take as the starting point
the remaining term of the mortgage, but imposing short-term unaffordable
repayment terms on borrowers;
f) lenders stopping borrowers from selling the property themselves
(even where they have a buyer), then taking court possession proceedings,
the costs of which, together with other fees and charges for selling
the property, are then added to the borrower's debt; and
g) unacceptable delays, sometimes of years, in notifying borrowers
of their debts following possession, failures to provide detailed
breakdowns of the sums owed, or to take the borrower's current circumstances
into account when imposing repayment arrangements.