§ Dr. Brian Iddon (Bolton, South-East)Shortly after the general election in 1997, I was contacted by my constituents, David and Pauline Spencer. In 1992, they had run into financial difficulties and were put in touch with Wilmslow Financial Services. They had intended to borrow £5,000 to pay off mortgage arrears, associated county court judgments and a sum of money to a friend who had helped them with previous mortgage arrears.
Mr. and Mrs. Spencer were visited by Mr. Phillip Jones, who persuaded them to borrow £10,000 on the grounds that they needed to renew some of the windows in their property, and to allow them a flexible sum of money to make it easier for them to pay off the loan at the beginning of the repayment scheme. In my view, the Spencers were not made aware of the detailed conditions of the contract that they eventually signed.
Because Mr. Spencer was self-employed, Mr. Jones, the agent, proposed that he also pay a double protected payment premium. That was unnecessary, since Mrs. Spencer was not working at the time. The cost was an additional £3,526 and brought the total borrowed to £13,526. Mr. Spencer is a market trader and had combined earnings then of far less than £1,500 per month, although he had achieved that total once in the preceding months. Mr. Jones put that highest figure on the mortgage application form. A contract was signed with J & J Securities on 1 April 1992 and repayments began.
The Spencers feel that the agent did not adequately consider their monthly expenditure or income, or its sustainability. They were never asked to provide documentation to prove the figures that Mr. Jones put on the application certificate. Mr. Spencer was asked to provide evidence that he was self-employed, but production of a business card was all that Mr. Jones required. Mr. and Mrs. Spencer felt pressurised throughout their contacts with that agent. They had asked whether he could secure a loan for them from a high street building society or another reputable mortgage provider, but he informed them that their poor credit history made that highly unlikely. Mr. Jones pointed out that their credit rating could be improved sufficiently to secure another loan by entering into the J & J Securities contract and keeping up the repayments. Since they wanted to secure a second mortgage from a high street provider, that proposition began to sound attractive. In the event, they were precluded from going down their preferred avenue, as I shall explain.
There was no mention of the excessive commission that brokers are normally paid for securing that type of loan. I do not know how much commission Mr. Jones secured, but I have been made aware of a similar loan, worth £23,000. The commission on that was a very high £4,300. Unfortunately, Mr. Spencer became ill shortly after the loan was granted, and was unable to work. The protected payment premium scheme should have protected the Spencers during his period of illness. Mr. Spencer duly wrote to Wilmslow Financial Services in May 1993 but received no response. While loans were usually made for 15 years, the premiums covered only the first five years. Hence, clients paid for a loan to cover the premium for three times as long as the premium was operative.
132WH Many of the mortgage deals negotiated by the companies seem to have been with the most financially vulnerable clients, with a view to repossession and resale of the properties. For example, one was with a pensioner couple living on stale benefits who wanted to buy their council house under the Government's right to buy scheme. The Spencers were told that it would cost them about £1,000 if they wished to settle the balance early. At that time the companies were applying the rule of 78—a complicated formula used to calculate redemption figures—for settlement of loans. Redemption figures are usually a considerable percentage of the loan and make it virtually impossible for clients to switch mortgages to high street lenders.
In June 1993, J & J Securities attempted to repossess the Spencers' house. The protected payment premium scheme, which had cost them £3,256 before interest, proved worthless. Fortunately, an agreement was reached in court between the Spencers and the company, which meant that they were not forced out of their home. They are still living there under duress. They have suffered a lot of stress as a result of having entered into the agreement and have had to endure numerous court proceedings. They are still under constant threat of losing the house.
The Spencers had been told by the agent that the interest rate would be 13.5 per cent. and that they would risk repossession of their property if they failed to make repayments. However, in the particulars of claim relating to the court case the Spencers found out the truth about the interest rates applied. Paragraph 2 of that claim states:
The loan agreement provided that the loan was to be repaid, together with interest, at the monthly rate of 2.31 per cent. flat rate with an Annual Percentage Rate of 31.5 per cent. by monthly instalments of £3 17.66".To show how financially punishing the agreement has been, I should like to put on record the most recent redemption statement that the Spencers have received, through their present solicitor, from CMR Loans Servicing Ltd., dated 15 March 2001. Before I quote the figures, I should explain that the loan has been rewritten since the court proceedings, but the APR, which is now 21.5 per cent., is still punishingly high. In March, the total charge for credit had reached a massive £44,579.40, including the original loan of £13,526. At that date, the Spencers had parted with £27,776.88 and the sum required to redeem the loan after all those charges was another £16,978.77. Some companies that have been operating such loans have used dual interest rates in their contracts. While regular payments are kept up, a concessionary interest rate operates. However, if even one payment is missed, a much higher interest rate kicks in. Fortunately, that does not apply in the Spencers' case.While the original loan was secured with J & J Securities Ltd., the Spencers have dealt with a string of companies as their business has been handed down a chain: from J & J Securities Ltd. to City Mortgage Corporation—CMC —then, more recently, Ocwen Asset Investment UK LLC—OAI—and, now, igroup plc, which claims that it manages the Ocwen loans in the UK, of which there are approximately 10,000 in total. It is interesting to note that the Royal Bank of Scotland has a 49 per cent. share in igroup.
133WH Successive solicitors employed by the Spencers have found it difficult to keep track of the changing companies, which has also made legal actions complicated. Several solicitors are attempting court proceedings on behalf of thousands of clients, with little success to date. The National Association of Mortgage Victims has also tracked proceedings and offered advice to its members.
Since 1997, I have written to several Ministers in different Departments of State and approached different agencies in an attempt to help the Spencers, so far without success. Hence the need for this debate. The activities of these companies have been well documented in the press. On 8 April 2000, The Guardian published an article entitled "Turning screw on poor", which detailed the case of Trevor and Susan Reeves of Suffolk. They took out a loan with Homestead Financing, which was subsequently taken over by City Mortgage Corporation. They were treated in an unsatisfactory manner and faced the prospect of having their home repossessed. Articles in other newspapers, such as the News of the World, The Times and The Daily Telegraph, have also highlighted the unscrupulous nature of these dealings. However, despite such widespread uncomplimentary media coverage, companies are still trading in the market, largely unregulated.
In July 1997, the Director General of Fair Trading issued guidelines for lenders and brokers in the non-status lending market, which is also referred to as the sub-prime or impaired credit market. Those guidelines, which were revised in November 1997, highlighted some of the main practices in the market, which the Director General found to be
deceitful or oppressive, or otherwise unfair or improper, within the meaning of Section 25(2)(d) of the Consumer Credit Act, and which would be likely to lead me to take regulatory action against those involved.The report on the revised guidelines correctly indicates that the mortgage lending market is not subject to regulation under the Financial Services Act 1986. However, I have received indications that mortgages may become subject to regulation under that Act, and perhaps the Minister will say whether that is the case.Nevertheless, a licence is required under the Consumer Credit Act 1974 from the Director General of Fair Trading to engage in a credit business or ancillary credit business. The fitness of licence holders can be brought into question by evidence of unfair business practices. City Mortgage Corporation gave undertakings to the Director General of Fair Trading in December 1997—as, subsequently, did Ocwen when it acquired the CMC business—in response to concerns arising under the Act and under the Unfair Terms in Consumer Contracts Regulations 1999. Ocwen was then the subject of a management buy-out—by igroup, I believe.
I quote from a letter of 3 March 1908, which I received from the Minister who was then responsible for competitiveness and consumer affairs at the Department of Trade and Industry. The letter states:
CMC agreed to stop imposing the unfair penalties in all"—and I underline all—its loan agreements, old and new.Apparently, igroup has agreed to investigate any borrower's complaint referred to it by the Office of Fair Trading, a trading standards department or a citizens 134WH advice bureau, and to report on the outcome of its investigation. After the title of this debate was published, the National Association of Citizens Advice Bureaux contacted me to say that it receives a high proportion of complaints about this market. I received a letter from it this morning. It states:NACAB is receiving an increasing amount of evidence from citizens advice bureaux all over the country about the practices of Igroup, both concerning the loans they manage on behalf of Ocwen US and their own loans.There are 50,000 such loans at present, and igroup continues to make them. The letter goes on to state:Our main concerns are as follows: interest rates on loans managed on behalf of Ocwen US… the actions and behaviour of some brokers selling Igroup loans";and the way that arrears and possession cases are dealt with before court, in court and following court proceedings. I do not have the time to read the full list of complaints that has been forwarded to me by NACAB, but there is clearly still a lot of concern about the mortgage lending market, indeed about igroup as well as all the precursor companies that I have mentioned.Ocwen and igroup are aware of the thousands of borrowers who, like the Spencers, borrowed money from the constituent companies that became City Mortgage Corporation prior to the Director General of Fair Trading becoming involved in these businesses in 1997. I would like to pose a question to igroup, the Royal Bank of Scotland, and to the Director General of Fair Trading. Why cannot people like the Spencers—at least 10,000 and possibly 50,000 people—be transferred to contracts and interest rates like those issued since 1 August 1997? Can we please have some of the unfair conditions attached to those contracts removed?
I look forward to a response to that important question. I challenge Ocwen, igroup and the Royal Bank of Scotland to end the misery of the Spencers and countless other borrowers like them. It should not be necessary for each of the individual borrowers to take separate legal action, when these companies know exactly who their customers are.
I hope that this debate has highlighted the desperate situation still faced by thousands of people in the mortgage market. Other right hon. and hon. Members have raised similar concerns in the past, both in correspondence with Ministers and on the Floor of the House. It is my strong opinion that Government action on the residual poor practices of these companies is long overdue, and I ask my hon. Friend to consider that. I look forward to his response.
§ The Minister for Competition and Consumer Affairs (Dr. Kim Howells)I congratulate my hon. Friend the Member for Bolton, South-East (Dr Iddon) on securing this debate. I know, from previous conversations with him, that he has researched this issue with tremendous thoroughness on behalf of his constituents, and done an extremely good job of it. In doing so, he has contributed greatly to our thinking on how best we should move forward on issues such as this.
My hon. Friend has raised an issue that is of great concern to many consumers including those outside his constituency, and probably concerns consumers in the 135WH constituencies of all hon. Members. The Government recognise that the relative lack of choice available to borrowers who have a low credit rating or who have had credit problems in the past makes them potentially vulnerable to unscrupulous lenders and unfair lending practices. In the past, some non-status lenders have been associated with exploitative lending practices and it is vital that these people are protected effectively by our consumer legislation.
Mortgages and other loans, both secured on the home and unsecured, are already subject to regulation. Since taking office, as my hon. Friend has described to us, the Government have introduced legislation to increase the protection for borrowers. We plan further changes to increase that protection in the near future, and in response to some of the questions posed, I will try to describe some of them. I shall deal first with the consumer credit licensing system and the non-status guidelines of the Director General of Fair Trading.
The Consumer Credit Act 1974 already applies to many non-status loans and, under the Act, traders require consumer credit licences to lend to consumers. The Director General of Fair Trading administers the licensing system and must satisfy himself that traders are fit and proper persons to hold licences. He has powers to vary, suspend or revoke licences where he considers that that is justified. The Director General has also used his powers to introduce guidelines for lenders and brokers involved in the non-status sector.
The guidelines set out practices that the Director General of Fair Trading regards as deceitful or oppressive, or otherwise unfair or improper, whether unlawful or not, and which would be likely to lead him to take regulatory action against licence holders or to consider using his powers under the Unfair Terms in Consumer Contracts Regulations 1999. They also set out examples of good practice that the director general considers both lenders and brokers should adopt, and we have heard about some of them today.
The guidelines emphasise the need above all for transparency in lenders' and brokers' dealings with their customers. They state that there should be no high-pressure selling and that borrowers should be given ample opportunity to read and understand the loan conditions, and to seek independent advice, if necessary, before they commit themselves. Lenders should not cold call and their advertising and promotional material should be clear and not misleading.
The guidelines require that non-status lenders, like other lenders, should lend responsibly and that their underwriting decisions should be subject to a proper assessment of the borrower's ability to repay, taking full account of relevant factors. I noted from my hon. Friend's speech that information about his constituents' earning power and potential was completely distorted in the calculations about the loan—in favour of the lender, of course.
I believe that the guidelines have significantly improved practices in the non-status sector. Some of the worst practices of a few years back, such as penal increases in the interest rate, which could be triggered if a borrower's monthly repayment was a few days late, are no longer a problem for consumers. Nevertheless, 136WH the guidelines are almost four years old, and I am glad that the Office of Fair Trading intends to review them this year to ensure that they are comprehensive and adequately cover any changes in the market.
The Government are determined that lenders should not take advantage of mortgage borrowers when they may be vulnerable because they are focusing on a home purchase. We have decided that the Financial Services Authority should be given responsibility for regulating virtually all retail mortgages, regardless of who the lender is or why the loan is taken out. The mortgage loans to be regulated by the FSA will be loans of any size that are first legal charges on UK properties, where at least 40 per cent. of the property is for residential accommodation.
Mortgage lenders, like all other authorised firms, will need to meet the FSA's high standards on fitness and propriety to carry out the business in question. That will not be simply a requirement for obtaining authorisation. The lenders will need to maintain the standards if they are to continue to retain authorised status. I am very glad about that, because all too often in the past, lenders were not judged or monitored as closely as they should have been after obtaining licences. The FSA has recently consulted on its high-level approach to mortgage regulation, including the information that will have to be disclosed to borrowers. That will ensure that borrowers will be aware about both the mortgage product and their responsibilities. The FSA's recent consultation also suggested that it is minded to introduce rules on the treatment of those in arrears or facing repossession—for example, setting minimum standards as to the type and frequency of information supplied to consumers. The FSA's consultation paper explained that the OFT's guidelines on non-status lending, together with the Council of Mortgage Lenders' statement on handling arrears and possessions, will be taken into account when its detailed approach to mortgage regulation is formulated.
The FSA will shortly consult on detailed rules for mortgage regulation. My hon. Friend asked when mortgage regulation is likely to happen. We expect that it will come into force no later than August 2002, just over a year away. I am glad to see that the process will be that rapid.
My hon. Friend also referred to unfair contract terms. Under the Unfair Terms in Consumer Contracts Regulations 1999, consumers cannot be bound by contractual terms that are weighted unfairly in favour of the lender, such as terms that purport to give the lender the right to charge excessive early redemption penalties. However, as my hon. Friend has pointed out, it is one thing to be able to say that and another to get a court to agree with it. It is very difficult to provide the cast iron evidence needed to prove that such distortions have taken place, especially in cases that took place nine years ago.
The DGFT and every local authority trading standards department have the power to prevent the use of unfair contract terms, if necessary by seeking a court injunction. The Financial Services Authority will gain those powers on 1 May 2001. The regulations also give individuals the right to challenge unfair terms in contracts into which they have entered with lenders.
137WH There have been instances in which the courts have determined that the terms in non-status loan contracts are unfair and, therefore, unenforceable.
I recently made the "stop now" regulations, as we have named the injunctions directive that came from Europe. These regulations will come into force on 1 June 2001. They will give the Director General of Fair Trading and other consumer protection bodies the power to apply to the courts for "stop now" orders to stop traders in their tracks, so that they do not infringe a wide range of consumer protection legislation, including that on consumer credit. The powers can be used, for example, to stop lenders from failing to inform consumers of the total cost of credit. The regulations implement a European Union directive that will, for the first time, give UK consumer bodies the right to apply directly to the courts of other member states for injunctions to stop illegal practices that originate elsewhere in the community and that harm the collective interests of UK consumers.
We also plan to look at whether we should make changes to consumer credit legislation to complement the FSA's regulation of mortgages. The FSA will regulate those mortgages that are secured by a first legal charge. Often, that is not the critical issue, as my hon. Friend has said. It will not regulate those secured loans where the charge is not a first charge—for example, loans for double glazing. Because consumer credit legislation regulates only loans of up to £25,000, a significant rump of consumer loans will remain potentially unregulated. We need to consider whether to increase the upper financial limit for loans regulated by the legislation so that the majority of such loans will be protected.
The consumer credit legislation contains provisions that allow the courts to reopen extortionate credit bargains, so that justice can be done between the parties. Credit bargains are extortionate if they require the borrower to make payments that are grossly exorbitant or otherwise contravene ordinary principles of fair dealing. When the court is considering whether a credit bargain is extortionate, it can take, account of such factors as interest rates, whether the borrower was under financial pressure and his age and experience. If the court decides that the credit bargain is extortionate, its options include altering the terms of the agreement, requiring the lender to make repayments to the borrower and setting aside the whole or part of the borrower's obligations under the agreement.
The provisions have been used to re-open non-status credit agreements, but the Government recognise that they have not been used often, and they should be used more often. The Department of Trade and Industry commissioned research to examine the effectiveness of the provisions and make recommendations about how they could be changed to ensure that they provide the protection that was originally intended. We intend to introduce proposals for improving protection against extortionate credit and unfair lending practices in the near future.
Regulations under the Consumer Credit Act currently allow lenders to use the so-called rule of 78 when they work out the terms on which loans can be redeemed early. That method has been criticised as unfair and biased in favour of lenders, especially when it is applied to high-value, long-term loans such as 138WH those typically offered by non-status lenders. The Government intend to bring forward proposals to use a different method to calculate early settlement terms that would give a more balanced outcome. We also want to improve loan information, so that borrowers are aware of early settlement terms before they commit themselves to a particular loan offer. We believe that that will help those consumers who expect to redeem loans early to be able to identify the loan that offers the best overall deal.
I understand that igroup plc services loans that were previously owned by a company called Ocwen UK plc. Ocwen, in turn, had acquired the business and assets of the City Mortgage Corporation. The OFT obtained undertakings from the City Mortgage Corporation in 1997 that related to non-status loans that the company had. When Ocwen acquired its business and assets, it also gave undertakings to the OFT. As part of those undertakings, Ocwen agreed to investigate any borrower complaint referred to it by the OFT, a trading standards department or a citizens advice bureau and to report back to the OFT on the outcome of its investigation. When Ocwen found a complaint that was justified, it would consider in its undertaking providing an appropriate remedy for the borrower.
When Ocwen became igroup, igroup took on those undertakings. The OFT continues to monitor both the undertakings and igroup's compliance with them, especially in respect of borrower complaints. If my hon. Friend has information—which he clearly has—that is relevant to the undertakings or igroup's fitness to hold a consumer credit licence, I am sure that he will be willing to pass it to the OFT. That should be done as quickly as possible.
I do not want to condemn all non-status lending. Like my hon. Friends in the Chamber, all of us have constituents who need such lending from time to time. The higher interest rates charged by lenders in the sector are to some extent justified by the higher risks they take on. For some borrowers, obtaining a non-status loan is an important step towards re-establishing their credit worthiness. I am aware of borrowers who have taken out mortgages with non-status lenders and who, when they have shown that they are able to manage their debts, have been able to remortgage with lenders at more favourable rates.
It is important that as many of our citizens as possible have access to credit. Of that, I am convinced. However, non-status loans may be the only option for some of them. However, that lending must be on a responsible basis and the Government are determined to make sure that consumers are protected against the exploitative lending practices that my hon. Friend described. The changes that we have already made and those that we will introduce in the future will help to ensure that non-status borrowers, like other borrowers, get a fair deal. I thank my hon. Friend the Member for Bolton, South-East. He has made a significant contribution towards strengthening our determination as a Government to do whatever is required to bring fairness and protection for borrowers in the sort of situation that he has described and which has been experienced by his constituents. For that, we should all be grateful.
§ Question put and agreed to.
§ Adjourned accordingly at one minute to Two o'clock.