FSA's net widens

The Financial Services Authority will take responsibility for regulating arrears and repossessions, including mortgage shortfalls, on 31 October 2004.

Most mortgage lenders have been gearing up for some time to ensure that they will meet the terms of the new regulatory code. Solicitors acting for lenders need to ensure that they understand the new obligations on their clients. In some cases, they must also ensure that they will be fully compliant with the regulations prior to the start date.

The detailed rules governing regulation can be found at www.fsa.gov.uk/pubs/policy/ps186/ index.html under “Regulating mortgage sales: final conduct of business rules Volume 2”. Although this FSA policy statement covers the whole of the mortgage process from start to finish, only a relatively small part of the regulations apply to arrears and repossessions. This part is called MCOB 13.

Commenting on MCOB 13, the FSA has previously stated: “The rules reinforce the principle of fair treatment for consumers who are in arrears or facing repossession. This includes specific information requirements, such as a new FSA information sheet which lenders must provide when a consumer first goes into arrears.”

Indeed, the two fundamental principles underlying the rules are (a) fair treatment to customers; and (b) the creation and continued operation of a written policy for recovering payments.

Policy and customer relations

The written policy must include:

• using reasonable efforts to reach an agreement with a customer over the method of repaying any debt, having regard to the desirability of agreeing with the customer an alternative to taking possession of the property;
• adopting a reasonable approach to the time over which the payment shortfall or mortgage shortfall debt should be repaid;
• giving consideration, where no reasonable payment arrangement can be made, to the customer being allowed to remain in possession to effect a sale; and
• repossessing the property only where all other reasonable attempts to resolve the position have failed.

The FSA expands these principles by providing inter alia that customers should be given a reasonable period of time to consider any proposals for payment that are put to them; and that in addition, a lender may wish to do one or more of the following with the agreement of the customer:

• extend the term of the regulated mortgage contract; or
• change the type of the regulated mortgage contract (for example, from repayment to interest only); or
• defer payment of interest due; or
• treat the payment shortfall as if it was part of the original amount borrowed. However, a lender should not automatically capitalise arrears.

Outsourcing of any aspect of the customer relationship (specifically including debt collection) does not in any way detract from the lender’s responsibility to the FSA – but the lender will justifiably be unhappy if its appointed agents let it down.

Records – do not destroy

This is an area where solicitors may have to change their procedures to ensure they do not render their clients in breach of their obligations to the FSA.

Records must be kept (without limit of time) which will enable compliance to be demonstrated with the rules on provision of information to customers; the way in which the customer has been dealt with; and the way in which the repossession property has been disposed of (including its marketing).

If, however, the arrears or shortfall are cleared, records may be disposed of one year after that date.

Therefore in a case which does not resolve (including by definition all repossessions involving evictions), it is no longer sufficient for a solicitor to keep his file only for the period required by the Law Society of Scotland.

The records must include:

• the date of first communication with the customer after the account was identified as being in arrears;
• in relation to correspondence issued to a customer in arrears, the name and contact number of the employee dealing with that correspondence, where known;
• information relating to any new payment arrangements proposed;
• the date of issue of any legal documents;
• the arrangements made for sale after the repossession (whether legal or voluntary); and
• the date of any communication summarising the customer’s outstanding debt after sale of the repossessed property.

The records must be accessible for inspection by the FSA within two business days of any request being received. The records may be kept in such form as you choose, provided the record is accessible for inspection within the stated time period. If you choose to maintain records in electronic form, you must take reasonable steps to ensure that:

(a) the electronic record accurately reflects the original information; and

(b) the electronic record has not been subject to unauthorised or accidental alteration.

What debtors must be told

If a customer falls into arrears on a regulated mortgage contract, a lender (or its agent) must as soon as possible, and in any event within 15 business days of becoming aware of that fact, provide the customer with the following in a “durable medium” (i.e. not just verbally):

(1) the current FSA information sheet on mortgage arrears;

(2) a list of the due payments either missed or only paid in part;

(3) the total sum of the payment shortfall;

(4) the charges incurred as a result of the payment shortfall;

(5) the total outstanding debt, excluding charges that may be added on redemption; and

(6) an indication of the nature (and where possible the level) of charges the customer is likely to incur unless the payment shortfall is cleared.

The principle of an information sheet is to be welcomed: it narrates useful suggestions such as “Do something now”, “Contact your mortgage lenders for help” and “Do a personal budget”. However, its section on “Things to avoid” includes “Handing back the keys”, which is unhelpful when that might be in the customer’s best interests.

The lender must still provide full details to the customer even where the account had been in arrears previously within the last 12 months, and at that time the customer received the details above, cleared the arrears but then fell into arrears again.

While a customer remains in arrears, the lender must tell the debtor at least once a quarter what payments are due, the actual shortfall on payments which has resulted, the charges incurred and the total amount of the debt. For solicitors involved in protracted actions over arrears, it will be important to establish whether this advice is the responsibility of the solicitor or the instructing client.

Before commencing repossession action, the lender must:

(1) provide an update on the data listed at points 2 to 6 above;

(2) ensure that the customer is informed of the need to contact the local authority to establish whether the customer is eligible for local authority housing after his property is repossessed; and

(3) clearly state the action that will be taken with regard to repossession.

Pressure on customers

A lender must not put pressure on a customer through excessive telephone calls or correspondence, or by contact at an unreasonable hour; this is defined as being usually between 8am and 9pm but if you have particular knowledge about the customer’s work pattern or religious faith, that might make it unreasonable to contact the customer even during (certain of) these hours.

Marketing a repossessed property

Whenever a property is repossessed (whether voluntarily or through legal action), steps must be taken to:

(1) market the property for sale as soon as possible; and
(2) obtain the best price that might reasonably be paid, taking account of factors such as market conditions as well as the continuing increase in the amount owed by the customer under the regulated mortgage contract.

The FSA expressly recognises that a balance has to be struck between the need to sell the property as soon as possible (to reduce or remove the outstanding debt) and other factors which may prompt the delay of the sale. In addition to market conditions, this could include the expiry of a period when a grant is repayable on resale, or the discovery of a title defect that needs to be remedied if the optimal selling price is to be achieved.

Strictly speaking, this does no more than restate lenders’ existing obligations under section 25 of the Conveyancing and Feudal Reform (Scotland) Act 1970. However, failure to meet the section 25 duty has not to date meant automatic punishment for the creditor; in Davidson v Clydesdale Bank plc 2002 GWD 13-426, the creditor’s agents had failed to take all reasonable steps but no loss resulted and the case failed. Under the new regime, the absence of a loss will not necessarily avoid the wrath of the FSA.

Shortfalls and surpluses

If the proceeds of sale are less than the debt, then as soon as possible after the sale of a repossessed property, the customer must be informed of:
(1) the mortgage shortfall debt; and
(2) where relevant, the fact that the mortgage shortfall debt may be pursued by another company (for example, a mortgage indemnity insurer).

If the decision is made to recover the mortgage shortfall debt, the lender must ensure that the customer is notified of this intention. The notification must take place within five years of the date of the sale.

This rule was revised almost at the end of the consultation process to ensure that the customer receives a decision as quickly as possible (or at least sooner than has often happened in the past) as to whether the shortfall is to be pursued.

If the proceeds of sale are more than the debt, reasonable steps must be taken, as soon as possible after the sale, to inform the customer of the surplus and (subject to the rights of any subsequent mortgage or charge holders) to pay it to him. Other than requiring speedy action by the lender, this simply restates the existing law as found in section 27 of the 1970 Act.

Let’s face it: it’s not interesting reading but compliance is a must – you have about two months to get ready.

Mark Higgins, Partner, Golds, Glasgow