Consumer Credit Act 1974 (Amendment) (Hansard, 4 March 1981)

§ Mr. Ken Weetch (Ipswich)
I beg to move, That leave be given to bring in a Bill to amend sections 52 and 53 of the Consumer Credit Act 1974 in order to require building societies to follow 'truth in lending' policies when providing to prospective borrowers information about the financial terms on which mortgages are offered and when displaying such information. The proposed Bill is concerned with truth in lending. For that purpose I seek to amend the Consumer Credit Act 1974, which established in legislation the principle of truth in lending. The Act was a considerable step forward because, in simple terms, it obliged those who lent money and advertised credit to quote accurate and true rates of interest.
The Act stated that borrowers had to be told the truth about the rate of interest that they were being charged. It established a standard formula for quoting interest rates when they were advertised publicly. That is the APR, or the annual percentage rate of interest. The APR. or the true rate of interest, is the rate of interest, broadly speaking, that takes into consideration the value of the repayments made on the loan received. That is a simple working definition.
The 1974 Act arose as a result of the Crowther report on consumer credit. The aim of the Act was to compel providers of credit to quote rates of interest in a standard way so that the consumer could make a comparison of one interest rate with another. In practice, the Act was an aid to more effective credit competition. However, it is astonishing that the largest lenders, the building societies, were exempted from its provisions. The biggest purveyors of credit were allowed to escape scot-free from its obligations. If someone borrows money to buy a bicycle or a hi-fi system, the person lending the money has to quote the true interest rate. However, if a person borrows money for a house—the most important purchase of his life—there is no obligation on the building society to give the true interest cost of the loan.
If on an ordinary repayment mortgage—the sort that most people have—a person thinks that he is borrowing at 15 per cent., that is not the truth, because the true rate of interest is higher. That is because the building society charges 15 per cent. interest on the whole amount of the loan outstanding at the beginning of the year. In reality, however, one pays monthly, and each monthly payment includes a repayment of part of the principal as well as the interest on the loan.
Because that is not allowed for in the calculations, the true rate of interest is higher that that quoted by the building society. A person may think that he is borrowing at 15 per cent., but over 15 years the true rate of interest is 16.6 per cent. Over 20 years the true rate of interest is 16.4 per cent. and over 25 years the true rate is 16-2 per cent. At best, that is misleading and, at worst, deception.
278 There is no good reason to exclude building societies from the obligations that most other lenders have to fulfil. The position is confused in mortgage lending because, although building societies are excluded from those obligations, other organisations, such as the banks and the trustee savings banks, are included.

§ Sir William Clark (Croydon, South)
So are local authorities.

§ Mr. Weetch
I accept that local authorities are included.
The major disadvantage for the house purchaser is that he is hindered from comparing one rate of interest with another. There have been times when many could have obtained better financial terms from the banks. But the banks were placed at a disadvantage in advertising because they were obliged to quote true rates while the building societies were not. There is no justification for that. The administrative problems involved in quoting the APR are not so formidable that they justify concealing the truth.
The Bill is based on two principles. The first is that millions of home buyers throughout the country are worth protecting and it is worth revealing to them the true cost of the credit that they pay. The second is that in rates of interest and credit, as in anything else, the truth is the truth.