Following on from the Government’s recent introduction of a new-build indemnity scheme to help purchasers of new-build properties who are struggling to obtain a mortgage, the Council of Mortgage Lenders has said that over the past few months it has received a “steady trickle” of enquiries from local councils who want to be able to offer mortgages to local residents.

But are local councils really able to offer mortgages?

Well, actually yes. Despite what most people may think, local councils are able to offer mortgages without having to register with the Financial Services Authority, which regulates mortgage lending.

And they used to be popular.

During the 1960s, 1970s and early 1980s, thousands of homeowners had mortgages with their local councils. Local councils were able to offer cheap mortgages, mainly because they could borrow money at rates that were only slightly higher than those available to the UK Government; however, by the mid-1980s these loans became less attractive when mortgage finance became more readily available from banks and building societies.

And it also appears that established lenders are prepared to work with local councils in offering mortgages.

In March this year, fifteen local authorities across the UK agreed to put money into a Lloyds TSB scheme – entitled Local Lend a Hand – to increase the deposits of first-time buyers trying to buy a home in their areas; in some cases, first-timers have been able to buy a home with a deposit of as little as 5 per cent.

Borrowers can be rest assured that if they take out a mortgage with their local council and fall into arrears, the local council must uphold the FSA’s Treating Customers Fairly requirements (as any bank or building society would have to.)

Whether the local council mortgage makes a full national comeback remains to be seen, but for homebuyers in certain parts of the country it could be a viable option.

The proposal covers all loans to consumers to buy a home as well as certain loans to consumers to renovate a home. It also covers credit intermediaries. 

The proposed directive includes measures relating to:

•  Advertising and marketing.
• Pre-contractual information.
• Advice.
• Credit worthiness and suitability assessments.
• Early repayment.
• Regulation of credit intermediaries and non-credit institutions providing mortgage credit.

There will be a European Standard Information Sheet to assess consumers’ ability to repay the loans. Creditors will be required to refuse to grant credit if the creditworthiness assessment determines that the credit would be unsuitable for the consumer.  Equally however borrowers must provide all necessary and correct information to enable the creditworthiness assessment to be carried out.

The proposal has been submitted to the EU Parliament and Council but will need to be adopted and then need national measures to come into force.

The Commission at the same time published a working paper outlining national measures and practices to avoid foreclosure procedures for residential mortgage loans.  Please see link. http://ec.europa.eu/internal_market/finservices-retail/docs/credit/mortgage/sec_2011_357_en.pdf

In September 2001, Mrs Chandra gave  a guarantee in favour of Royal Bank of Scotland Plc limited to £700,000 and a legal charge to support company borrowings.  The company was involved in hotel development.  Although Mrs Chandra was a director of the company, her evidence was that at all material times she placed trust and confidence in her husband in relation to business matters.  Despite being a co-director she had no involvement in the business and had only visited the hotel once after the receivership had commenced.  A solicitor had been nominated to advise her on the meaning of executing the guarantee.

The Court of Appeal accepted that it was impossible to classify every type of situation in which improper or undue influence can be said to have been used to persuade a person to enter into the transaction under review.  However, clear examples are where there is a conscious deception, an abuse of confidence or a trusted adviser who prefers his own interest.

Undue influence is concerned with the abuse of relationship of trust and confidence between husband and wife.  At first instance there was no finding of undue pressure and this was not relied on in the appeal.  Mrs Chandra therefore had to rely on what was said by Mr Chandra as being a material misrepresentation which entitled her to have the guarantee set aside.

Mrs Chandra claimed that she had signed the guarantee as a result of her husband’s misrepresentation.  The misrepresentation was that the amount being borrowed would be enough to complete the development of the hotel.  Did this amount to a misrepresentation?  There was a lot of analysis in the judgment of the status of this statement.  However, the Court of Appeal concluded that this was not a misstatement.  It was an over-optimistic assessment of the chances of a future overspend.

As Lord Nicholls explained in the renowned House of Lords’ judgment of Royal Bank of Scotland Plc v Eteridge, which was delivered some 19 days before the execution of the guarantee: “when a husband is forecasting the future of his business and expressing his hopes or fears, a degree of hyperbole may only be natural and the courts should be slow to treat such exaggerations as misleading.”

Having decided that there was no misrepresentation, there was no need to consider the question of whether the bank was fixed with constructive notice of the undue influence or misrepresentation.

This case provides a good example of how a wife may attempt to set aside the guarantee that she has provided.  Mrs Chandra was unsuccessful as she was unable to establish that there had been undue influence nor could she establish a misrepresentation.  Where an allegation of misrepresentation is made, the courts will examine carefully the meaning and the impact of the alleged statement.  Merely because a statement is incorrect it does not automatically amount to a misrepresentation entitling a person to set aside the guarantee.

Royal Bank of Scotland Plc v Mr and Mrs Chandra [2011] EWCA Civ 191

The first question the court was asked to determine was whether with reference to section 29 of the Land Registration Act 2002 were any of the interests sufficient to be overriding interests?

The court had much sympathy for the occupiers. However, based on the previous case of Abbey National v Cann [1991], the court held that the purchaser of land who relies upon a building society or bank loan for completion of his purchase in fact never acquires anything but an equity of redemption, for the land is, from the very inception, charged with the amount of the loan without which it could never have been transferred at all and it was never intended that it should be otherwise. On this basis the mortgagees’ rights under the charges had priority over any equitable rights that the occupiers may have acquired.

The second question the court determined was whether any of the tenancy agreements obtained priority. The leases were of a short duration and were non-registrable and in almost all the cases the registration of the mortgagee’s charge was made within the period of a priority period. The court held that these agreements did not obtain priority. Prior to registration the grant of the leasehold interests was not made out of a registered estate and only takes effect in equity.

Various mortgagors v various mortgagees and various occupiers [2010] EWHC 2991

It appeared that the whole transaction was a fraud.  The registered owners of the property had no knowledge of the transaction and the money disappeared. There was no allegation that the defendant was involved in the fraud. 

The claimant lender brought a claim for breach of trust.  Counsel for the lender argued that the solicitors did not have the authority to pay away the moneys except to achieve completion and completion was never achieved.  The solicitors’ counsel argued, however, that the authority was to pay away in connection with the purchase of the property and this is what the defendant did.

The court came down in the middle.  The authority entitled the defendant to pay away on receipt of the documents necessary to register title or if paying away before that stage, on receipt of a solicitor’s undertaking to provide such documents.  Here the solicitors paid away the money without receiving the requisite documents and without a solicitor’s undertaking to provide such documents.  As such, the solicitors were in breach of trust.

The solicitors then sought to rely on s61 of the Trustee Act 1925 which enables a trustee to claim relief for breach of trust if he has acted honestly and reasonably.  The solicitors submitted that the circumstances of the loan were unusual and the loan was approved by the lender in haste.  Even if that were the case, the court could not accept that the solicitors had acted reasonably having paid away the money to a firm of solicitors even though the necessary documentation had not been provided combined with the failure to investigate the firm of solicitors to whom they were sending the money.  

The solicitors also attempted to argue that any loss or damage suffered by the claimant was caused or contributed to by the lender because of its own fault. As the Trustee Act did not provide for this, the court were not prepared to extend the law in this way.

This case is a good example of when a claim for breach of trust can be brought.  By bringing such a claim, the lenders avoided having to show any negligence or fault by the solicitors and there was no issue of contributory negligence.

 Lloyds TSB v Markandan & Uddin [2010] EWHC 2517

Mr Cowey and Ms Cowlam charged their property in favour of the claimant, Annulment Funding Company Ltd.  The claimant provided funds to bankrupts to obtain, as their name suggests, an annulment of their bankruptcy.  Following annulment, the intention was that the former bankrupt would obtain a mortgage from another lender to pay off any prior charges on the property.  The funds advanced by the claimant were short term at a level of interest to reflect the fact that the borrower was bankrupt and not in a position to borrow elsewhere. 

In August 2007, Mr Cowey and Ms Cowlam signed a mortgage deed in favour of the claimant over their house in order to obtain an annulment of Mr Cowey’s bankruptcy.  The annulment was obtained.  Efforts were made to find a mortgage lender to repay the claimant, but those efforts were unsuccessful.  As a result, the loan from claimant, which was meant to be short term was not repaid and claimant called in the loan.

At first instance, the court decided that Ms Cowlam entered into the charge as a result of the actual undue influence of Mr Cowey and the claimant was bound by that.   Mr Cowey had taken advantage of Ms Cowlam and caused her to enter into a transaction which was very much against her interests. They had both misunderstood the position and had not realised that they had agreed to enter into a charge over their house.

 The claimant appealed on the basis that the original defence had relied upon an inference of undue influence or presumed undue influence and it was not open to the judge to make a finding of actual undue influence.  Somewhat unsurprisingly this appeal did not succeed.  Secondly, the claimant argued that there was insufficient evidence to have made a finding of actual undue influence, but again the Court of Appeal rejected this ground of appeal. 

In addition, the claimant asserted that although the charge could be set aside, the loan should be allowed to stand as Ms Cowlam had understood that she was entering into a loan.  However, a finding that Ms Cowlam was liable to repay the loan and a judgment against her would mean that it would be open to the claimant to obtain a charging order. Although the claimant argued that it was possible to sever the part of the transaction which is not affected by the undue influence, the court held that both the loan and the charge were disadvantageous and both were affected by undue influence.  Accordingly no question arose of severing a part of this transaction. 

 Annulment Funding Company Limited v Cowey and Cowlam [2010] EWCA Civ 711

14,373 mortgage possession claims led to orders being made, which was 15% lower than in the first quarter of 2009. 

46% of mortgage possession claims led to suspension orders being made, which was a similar figure to the first quarter of 2009.

The draft guidance consists of a document setting out the technical legal issues for businesses and consumer advisers, and a simpler version for consumers.

The consultation is open until 21 April 2010.  The technical legal advice makes the following points:

•  Consumers have been given an exaggerated expectation of what the creditor or owner must do in order to comply with an information request as a result of misleading claims by claims management companies and inaccurate information on the internet.
• A number of creditors, appear not to understand their obligations under these sections.
• The purpose of these sections is to provide information to the consumer, not to provide a method for consumers to avoid paying their debts.
• The OFT considers that the creditor in sections 77 and 78 and the owner in section 79 includes a person who has merely bought the debts under the agreement. 
• As well as assignees ensuring that they are able to obtain from the assignor copies of the agreements and documents and historical information on the account, the original creditor should ensure that if necessary and appropriate, it is able to readily obtain from assignees any necessary information on the most recent state of the account.
• The creditor should satisfy itself that the writer of the request has the proper authority to obtain the information.  If there is no authority with the request the creditor is entitled to reply by asking to see the authority.
• If the request comes from only one debtor where there are two or more debtors, it must be complied with and the response given to both or all debtors.
• The creditor is not entitled to charge more than £1.
• The creditor can send the documents by ordinary second class post to the address given in the request.
• It is wise to retain some record of posting.
• If a claims management company does not hold a license then the OFT would expect the creditor to inform the debtor/hirer  why the information is being sent direct to him and to notify the OFT and Ministry of Justice.
• The request should be complied within 12 working days after the receipt is received.  The day the request is received is not included, but it will include the day the information is sent.
• A true copy as confirmed in the recent case of Carey v HSBC Bank plc does not mean an exact copy.
• There is no obligation to provide a signed copy.  The creditor may be able to provide evidence that its practice was always to require a signature to its agreements.
• The creditor can reconstitute a copy of the agreement.  The name and address at the time of execution must be included, but this can be taken from any source available.
• If the reason why no copy of the agreement is given to a request under these sections is that there never was an executed agreement, the creditor should acknowledge this in its response.
• Where there has been a variation, the duty is to provide the original agreement, but a copy of the latest variation or a clear statement of the terms of the agreement as varied.
• Any copy must be easily legible.
• The consultation provides details of the documents to be provided.
• The consultation also provides details of the statements of account that should be provided.
• The duty does not apply if the agreement has been paid off or terminated.
• It does not apply where judgment has been obtained unless there is an interest-after judgment clause in the agreement which the creditor or owner has not expressly waived.
• If the creditor fails to comply with the duty, it is not entitled, while the failure to comply continues, to enforce the agreement.
• If sections cannot be complied with, the debt does not disappear and it is perfectly acceptable for a creditor to seek to pursue the debt and to register any arrears or default with a credit reference agency.
• If a creditor were to threaten court action, knowing that such action is not possible, this would be misleading and oppressive.
• Where an agreement is unenforceable because of non-compliance with the sections:
• The OFT would expect the creditor to take steps to check that there was an agreement and that there are monies outstanding.
• No communications or requests should threaten court action or other enforcement of the debt where the creditor is aware that it cannot or will not be entitled to enforce the agreement.
• The creditor should make it clear in communications that the debt is unenforceable.  Failure to do so would unfairly mislead the debtor.
• Where a creditor has satisfied itself that a debt does exist and is correctly described, it is acting fairly in registering a default with credit reference agencies and informing the debtor or hirer that it intends to do so. 

 The key arrears proposals:

• Make plain that firms must not add early repayment charges on arrears charges and interest levied on those charges;
• Clarify that firms must not apply a monthly arrears charge where the firm and the customer have agreed an arrangement to repay the arrears;
• Compel firms to consider all options for borrowers.  Repossessions should always be the last resort;
• Confirm that payments by customers in financial difficulties must first be allocated to clearing the missed monthly payments, rather than to arrears charges, which can be repaid later; and
• Oblige firms to record all arrears handling telephone calls and to keep all records for three years.

• The consultation is on a proposal to require mortgage lenders to obtain a court order or the consent of the borrower before repossessing and selling residential owner-occupied homes.
• The proposed changes would put current lending practice into law, and ensure that borrowers can access the protections offered by the court.
• The proposals relate to residential owner-occupied properties and would not affect buy-to-let mortgages or other commercial loans, nor affect other remedies available to mortgage lenders where a borrower defaults on a mortgage.

http://www.justice.gov.uk/latest-updates/mortgages-power-sale.htm

As the Judge acknowledged,  the risk of the tenancy being a forgery was remote, but if no inquiries are made of those in occupation then the bank “misses out because of it.”

HSBC Bank PLC v Amanda-Jane Margaret Dyche Alfonso Collelldevall  [2009] EWHC 2954 18 November 2009

The proposals, published in the mortgage market review discussion paper, reflect the FSA’s changed approach to a more intrusive and interventionist style of regulation.

The review’s key features are:

• Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;
• Banning ‘self-cert’ mortgages through required verification of borrowers’ income;
• Banning the sale of products which contain certain ‘toxic combinations’ of characteristics that put borrowers at risk;
• Banning arrears charges when a borrower is already repaying and ensuring firms do not profit from people in arrears;
• Requiring all mortgage advisers to be personally accountable to the FSA; and
• Calling for the FSA’s scope to cover buy-to-let and all lending secured on a home.