Consumer Credit (Hansard, 16 October 2001)

§ Mr. Barry Gardiner (Brent, North)

In securing this debate, my original intention was to examine the words of a young Back Bencher who, in 1987, was discussing that part of the consumer credit industry referred to as "sub-prime". He said: I think you need some measure of control and regulation to ensure that the unscrupulous aren't lending to the desperate when there's no possibility of repayment. The young Back Bencher in question is now the Prime Minister.

I planned to examine today what effect the intervening years have had on the consumer credit industry. I wanted to look at current Government proposals, such as the task force on overindebtedness, and to discuss with the Minister ways in which consumer credit legislation could be updated. However, a particular aspect of the consumer credit industry has come to the fore during my investigations of the past 24 hours, and it is that aspect that I now want to raise with the Minister. She and I therefore share a common dilemma in that both of us may have to tear up our prepared speeches. I trust that she will be able to go with the flow of today's discussion.

On Friday 28 November 1997, before His Honour Judge Rubery at Stoke-on-Trent county court, the case of City Mortgage Corporation v. Riley was concluded. Given the Minister's previous role in the Government, she will be familiar with City Mortgage Corporation and many other financial corporations that I will talk about today. It must be said that CMC is not a company with a good track record in the industry. This was a typical case, like many that CMC had taken to court, involving repossession of a family's property. Of course, the mortgage had been secured on the property, but I am pleased to say that the judgment was not as CMC might have expected.

CMC argued that, although an equitable interest had been transferred to an American-based company called Greenwich International Ltd., CMC none the less had the right to enforce the debt. I am pleased to say that the court found otherwise. Mrs. Riley had done quite a bit of background work, and discovered documentary evidence showing that the legal interest, as well as the equitable interest, had been transferred to Greenwich International. The charge by CMC had never been registered because the Rileys' mortgaged property was not registered land. In accordance with section 114 of the Law of Property Act 1925, the deeds operate to transfer all rights to sue on the security to Greenwich International in America, rather than City Mortgage Corporation.

The long and the short of it is that, having pursued this debt, City Mortgage Corporation was found unable to do so by the courts because it had no legal standing, and costs were awarded against CMC. Before dealing with the significance of this case, I must tie it in with a second case that was heard at Basingstoke county court on 21 March last year, over which His Honour Judge Anthony Thompson QC was presiding. The case was that of Rozak v. Capital Credit Ltd. I know that the Minister will be familiar with the name of Capital Credit.

230WH Judge Thompson's summation outlined the following. The proceedings had been commenced in February 1998, at which stage it was a mortgage possession action brought by the then claimants, City Mortgage Corporation—hon. Members will see that a link is already beginning to develop—against Mr. and Mrs. Rozak in respect of their property. That claim was settled and the Rozaks lost their property. However, the case that Judge Thompson was dealing with was a claim by the Rozaks against Capital Credit Ltd.

The background is that Mr. and Mrs. Rozak lived at their home for about 20 years prior to its repossession. It was a council house that they were eventually able to purchase under the Government's right-to-buy scheme. They bought the property with the aid of a mortgage of £29,000 from the Nationwide building society. Problems set in for the Rozaks in 1992, when Mrs. Rozak lost her job as a result of industrial injury, and arrears began to accrue on the property. Judgments were made against them in the county court. I stress that at all stages the Nationwide building society acted absolutely properly in this case.

By 1997, the situation had become quite serious and the Rozaks were on the point of having legal action taken against them by the Nationwide. During a further visit from the building society, the seriousness of their financial position and the arrears that had fallen due were made clear to them.

In effect, the Rozaks needed to borrow £7,500, but they did not know where they were going to get it from. At that time they saw in the News of the World an offer of loans and finance placed by Capital Credit Ltd., which said that they had a chance to clear all your debts with cash to spare on low monthly payments". Sums from £3,000 to £250,000 could be agreed. It was a tempting offer, which the Rozaks could not refuse, so they got in touch with Capital Credit. Capital Credit told them that because of their bad credit history it would not be able to give them the loan. However, it then offered them the opportunity to have someone come and talk to them about the possibility of a different loan, and sent a broker to meet them for that purpose.

At the meeting, the Rozaks were completely duped. They had wanted a loan of £7,500, but they were induced to remortgage entirely; instead of paying off their loan to the Nationwide, the new broker put them into an agreement with the City Mortgage Corporation. That loan was for a figure of some £47,000—a sum that at the increased rates of interest due on the mortgage, the Rozaks had no possible way of repaying.

What the Rozaks did not know was that the broker was a tied broker, and that they had entered into an agreement with City Mortgage Corporation with the original broker from Capital Credit. That agreement—I have a copy here, and will be happy to make it available to the Minister—was dated 21 December 1995 and was between City Mortgage Corporation Ltd., Capital Credit Ltd. and a certain Mr. Anthony Murtagh. It is a commission agreement. The court rightly looked at the agreement and the ruling by Judge Thompson explained that the broker was legally obliged to act on behalf of the Rozaks, but had not done so.

231WH It was clear from the right of first refusal in the agreement that Capital Credit acted as agents of the party whom they introduced—City Mortgage Corporation—rather than the Rozaks, and that although they owed that fiduciary duty to the Rozaks, they had in fact received secret commissions under the terms of the agreement. The court found that those commissions should be repaid, and that sum, plus costs, was made over to the Rozaks. However, to receive approximately £9,000 after losing the family home was a severe and bitter blow. It did not seem like compensation, because CMC had already obtained the Rozaks' home under a previous court judgment and sold it at a vast profit.

It is clear that secret commissions are a feature of the sub-prime lending market. Most mortgage lenders pay a fee to brokers for introducing a borrower; that is standard practice throughout the industry. The fee paid by a high-street lender for a standard domestic mortgage would probably be around £250. However, a non-status lender in the sub-prime market, which specialises in lending to people with poor credit ratings, often pays brokers a much higher introductory commission of up to 10 per cent. of the loan. That creates a clear conflict of interest between broker and client. If the broker persuades a prime lender to grant a £50,000 loan, the client receives an inexpensive loan, but the broker receives only around £250. If the broker places the client with a non-status lender or sub-prime lender, the broker may pocket up to £3,000, which is a common figure for brokers in the sub-prime market to expect as commission. In the Rozaks case there was not only £3,000 up-front commission, but additional secret commission which took the figure up to about £8,000. The rule of thumb is that the worse the mortgage, the higher the commission paid to the broker.

Some mortgage brokers place themselves in a particularly difficult position, as did Capital Credit, because they take commission from both sides. Capital Credit took the up-front commission of £3,000 but also received a finder's fee from the lender, or a first refusal commission, as the agreement to which I referred explains. Under civil law, a bribe is the payment of secret commission, which only means that, first, the person making the payment makes it to the agent of the other person with whom he is dealing; secondly, he makes it to that person knowing that that person is acting as the agent of the other person with whom he is dealing; thirdly, he fails to disclose to that other person with whom he is dealing that he has made the payment to the person whom he knows to be the other person's agent. If a lender gives money to a broker and does not tell the borrower that he is doing so, no matter what the intention, it is a bribe under the law. It is not necessary to establish a corrupt motive, nor does the principal have to show that the agent was influenced by the bribe.

The judge concluded by stating: there is no doubt that the defendants (Capital Credit) were tied brokers and had to offer, pursuant to the 'first refusal' agreement, all transactions primarily to CMC. It is also clear that there was a secret commission which was by the very nature of the first refusal agreement kept confidential and which was paid to the defendants by City Mortgage Corporation apparently on 1 May 1997 in respect of this transaction... At the end of the day what this comes to is this, here was a secret commission and on the basis of the authorities to which I have referred I am satisfied that in those 232WH circumstances Mr. and Mrs. Rozak are entitled either to recover damages or at their election to recover the commissions which were paid. The Rozaks did that, but it was not adequate compensation for having been duped into remortgaging, for not being able to pay off their original small debt to Nationwide, and for subsequently finding that their home was repossessed.

I started my speech by referring to the other case, in which it became clear that parties who had no right to repossess a home were doing so. That is the situation with regard to much of the sub-prime market. The Land Registry should record a charge against a property, as under the Companies Act—section 395, which is about the first charge form—only where the parties seeking to record such an interest have proved that they are creditors with all the rights, responsibilities and duties pursuant under the definition of a creditor under the Consumer Credit Act 1974.

At the moment, it is possible for someone to register a charge against a property even though they are not the legal owner of the loan against that property. The original case that Judge Rubery ruled on sets that out clearly. Unfortunately, the Land Registry does not make that clear, so most people in the sub-prime market have a charge against their property recorded by someone who is not the legal owner of the loan.

The case of City Mortgage Corporation offers a very good example of how that has been done. The company collapsed in 1997 as a result of a class action brought against the parent company, which was called Cityscape. The action was brought by the shareholders as they had, in effect, been lied to about how United Kingdom loans had been securitised. An out-of-court settlement was agreed with those shareholders, which was worth many millions of dollars. After City Mortgage Corporation collapsed, a company called Ocwen US began to collect the UK loans. Borrowers thought that Ocwen US owned the loans, but it did not. Ocwen US then set up a company called Ocwen UK, which sought to buy out the loans from Cityscape. There was a falling out over that, and in 1998, when the Office of Fair Trading issued guidelines to stop dual interest rates, Ocwen UK announced a mortgage holiday. That marked one of the substantial successes of the Office of Fair Trading at that time.

Ocwen UK was bought by the Royal Bank of Scotland in 1998 and a new company called the "I" Group was set up. I am aware that these names are very familiar to the Minister—although of course I am not referring to the Royal Bank of Scotland. The "I" Group is another extremely disreputable lending company. The Royal Bank of Scotland's intention was to clean up the sub-prime market. In fact, the "I" Group did not adhere to the regulations attached to it by the Royal Bank of Scotland and Ocwen Loans was still being sold and marketed as such until the middle of 2000. The "I" Group has now been bought out by GE Capital. In June of this year, it paid approximately £200 million for £1.6 billion worth of loans.

The difficulty is not keeping tabs on such matters—which is difficult enough—but in drawing together the strands. I want to explain matters as briefly as possible so that the Minister can at least acknowledge the problems. I do not expect her to make a substantive response this morning, but I hope that she will 233WH undertake to explore them further. Claims like that by Mr. and Mrs. Rozak are outstanding against the "I" Group, which is owned by GE Capital, which bought it from the Royal Bank of Scotland, and they could be worth about £1.25 billion. Such claims are every bit as good as the Rozaks' claim, and would stand up in court against the group because of the way in which homes have been repossessed by companies that had no legal ownership of the loans outstanding and charged against those properties.

The Government should regulate to make it illegal for any broker to conclude a loan agreement without the inclusion of a standard sheet or form setting out clearly and precisely all remuneration that the broker receives by way of commission or in any other way from the lender or any other party in respect of the contract. The broker is, and should be, the agent of the borrower. The mortgage code lays that down, and it is followed by most of the major mortgage companies and lenders. However, the code is ritually ignored in the sub-prime market, so the borrower does not know of the secret commissions and bribes that are paid when he or she takes out a loan. They form part of the illegal commissions that companies such as CMC, Ocwen and the "I" Group have been receiving and have based their business on in the sub-prime sector for many years.

It is also important that the Government review the decision of the Office of Fair Trading to refrain from taking proceedings in the restrictive practices court in respect of the agreement between City Mortgage Corporation Ltd., Capital Credit Ltd. and Anthony Murtagh, to which I referred earlier. That agreement is no longer in force, but the OFT should initiate proceedings in respect of what happened. The Minister should convene a meeting with GE Capital about the claims that the "I" Group, which it owns, faces about the secret commissions on loan contracts that the group had concluded. The meeting should focus on the practice in the market of pursuing such loans through a party that, although registered at the Land Registry as having a first charge against the property, had no legal ownership of the loans in the first place.