New industry guidance on mortgage arrears and possession
On 22 October 2008 the Council of Mortgage Lenders published new guidance on mortgage arrears and possessions. The Guidance will assist those who face the prospect of losing their homes as it seeks to strengthen the existing practices that mortgage lenders already have in place and make repossession of properties a last resort.
Lenders are currently regulated by the Financial Services Authority through its Mortgage Conduct of Business Rules, which set out how lenders should treat customers who are in arrears and face their homes being repossessed.
The Guidance aims to assist lenders in ensuring that their policies and procedures are compliant with the requirements of the rules.
The Guidance emphasises the fact that lenders should look at each customer’s case on its own merits and, where possible, should take all reasonable steps to negotiate a solution without the need to issue repossession proceedings. Examples of good practice are outlined in the guidance, which include:
The Lender should deal fairly with all customers in arrears. Consideration should be given to literature being clear and understandable, call centres should be adequately manned and attention should be given to individual files rather than a broad brush approach being adopted.
To avoid a customer ‘burying their head in the sand’ and hoping that the problem in meeting mortgage repayments will go away, cases should be managed pro-actively. Many customers may not be aware that at the end of their preferential product period, the interest rate may change leading to increased repayments. The guidance highlights that the customer should be kept fully informed of any changes to rates if they fall into arrears and how the matter will be dealt with.
Written policies should include steps that should be taken to reach agreement over the method of repaying any shortfall.
Such steps may include:
regular contact with the customer
a risk assessment of the customer. If low risk then minimal contact may be required. A fine balance needs to be adopted between putting pressure on the customer through excessive contact and keeping them fully informed
staff having the flexibility to negotiate
agreeing a repayment plan that the customer can afford and sustain following an assessment of income and expenditure
notifying the customer that they may wish to seek independent legal advice prior to any agreement being reached
considering changing the repayment date if the customer faces difficulties.
One of the key points to note from the Guidance is that clarity is essential, customers need to understand the position they find themselves in.
Repossession should only be sought where all alternative options have been explored with the customer, but have proved unsuccessful.
A lender should only apply to the court when:
all attempts to contact the customer have failed
an agreement has not been reached that the customer can afford
an agreement has been reached but the customer cannot sustain the payments
There is no reason why court proceedings should not be postponed where a subsequent agreement is reached following the issue of proceedings.
In an effort to attempt to avoid repossession proceedings, the Guidance points to the lender considering the following with the customer:
- extending the loan term to minimise the monthly payments
- change the type of mortgage, this may be appropriate for a short period of time
- defer payment of the amount owed, for example where the customer has lost their job. Thought should be given to the extent of the period where this would be allowed
- treat any shortfall as if it was part of the original amount borrowed. Customers should be made aware that the overall amount of the debt will increase and will consequently affect their monthly payments
The Guidance makes it clear that repossession should only be pursued where all else has failed and lenders’ policies and procedures should reflect this.
If proceedings are issued the customer should be informed of the process that will ensue and the lender should consider contacting any other chargees in an attempt to limit costs for the customer. The property should be sold for the best price possible and the customer notified of the ability to obtain advice from a third party.
Whilst the above only provides a summary of the main points contained in the Guidance, lenders should note that in order to adapt the guidance into their own policies and procedures emphasis should be placed on the training of staff to maintain standards and ensure a consistency of approach. This is particularly so now a pre-action protocol for court cases on repossession has been published, which sets out the steps lenders are expected to take before commencing a claim in the courts.
The pre-action protocol for mortgage possession cases will take effect from 19 November 2008. It is designed to encourage parties to exchange information at an early stage of the matter with a view to reaching a settlement without the need for the court’s intervention.
The protocol states that parties should:
- act fairly and reasonably with all communications being clear
- take all reasonable steps to discuss the cause of the arrears, the borrower’s financial circumstances and proposals for repayment of the arrears
- postpone possession proceedings to allow the borrower to take all reasonable steps to actively market the property
The protocol encourages the parties to negotiate and consider all available options before proceedings are commenced.
Failing to have effective policies in place to avoid the need to issue repossession proceedings, together with a failure to comply with the pre-action protocol if proceedings are necessary may lead to cost sanctions being imposed by the court as a result of non-compliance.