The PILS Project (Public Interest Litigation Support Project) was established in 2009 to advance human rights and equality in Northern Ireland through the use of and support for public interest litigation. It is the only organisation in Northern Ireland to increase access to justice by giving legal advice and financial support through a dedicated fund to its members for legal cases, which champion the rights of vulnerable people to participate fully in society.
This guest article relates to the recent financial support provided by the PILS Project to one its members, Housing Rights, in litigation that exposed a practice of mortgage lenders that has led to very significant consequences for a large number of families across the UK (Bank of Scotland v Rea and Others [2014] NI Master11.)
The test cases focused on what is known as mortgage capitalisation or consolidation. Capitalisation is where payment arrears are added to the outstanding balance and the monthly instalment is recalculated to ensure all the money borrowed is paid off by the time the mortgage ends. Capitalisation spreads the payment of the arrears over the life of the mortgage, so in a number of cases the monthly payment goes up by a relatively small amount.
The key question for the court to answer in these cases was set out in paragraph 2 of the judgment:
[The] cases raise a point of some importance, namely whether the lender may both (a) consolidate (or, as it is often called, “capitalise”) arrears of monthly instalments with the mortgage balance upon which the instalments are calculated with the effect of increasing the contractual monthly instalments to spread those arrears over the residue of the mortgage term and also (b) rely on the arrears so consolidated as outstanding arrears for the purpose of possession proceedings. (Emphasis from the judgment).
The Bank of Scotland was found to have consolidated or capitalised arrears on mortgage accounts without the consent of the borrowers, or even assessing whether the borrowers could afford the higher payments– this is known as ‘unilateral consolidation’.
Despite this consolidation, the bank wasalso using these same arrears as a basis for an application to the court for a Possession Order, to repossess family homes. In order to settle a case, or to suspend an order for possession, the bank wanted payments above and beyond the monthly instalment towards the arrears – bearing in mind the monthly instalment had alreadybeen recalculated, to repay those arrears over the rest of the mortgage.
The Master described the practices of the bank as ‘double billing’ and ‘unconscionable’. The court referred itself to guidelines known as the Mortgage Conduct of Business (MCOB) Rules, and concluded that this kind of unilateral consolidation was ‘extremely poor practice’.
The case was initially appealed by the lender, however the bank withdrew its appeal in late 2014.
The renewed importance of the decision relates to the UK’s Financial Conduct Authority (FCA) investigation into the practice which was completed in October 2016. The FCA found that unilateral consolidation was being carried out by a number of mortgage lenders, and it concluded that this unilateral consolidation was ‘likely’ to be a breach of FCA rules. The FCA estimated about 750,000 homes across the UK had been affected by this practice. However, it is not clear if this number takes into account those families who vacated or left their homes at the early stages of the repossession process, without seeking advice. Compensation may well be payable to the families affected, but such amounts are likely to be in the region of several hundred pounds, rather than thousands.
The investigation has also led to a consultation on guidance which seeks to rectify the problems caused by unilateral consolidation. The guidance aims to help lenders to identify borrowers affected by the practice; to compensate borrowers appropriately; to recalculate mortgage accounts to ensure they reflect accurately the state of the mortgage; and to stop the practice of unilateral consolidation itself. The consultation comes to an end in early January 2017, with a view to the FCA publishing finalised guidance in the first quarter of 2017.
This case and subsequent investigation highlight some of the strengths and challenges associated with strategic litigation. It is an example that demonstrates public interest cases can be found in the private law (those cases involving individuals or companies) as well as in the public law (cases where a part of the government is involved).
The case itself brought to light a practice of a lender that was technical and complex, but had very real effects and impacts upon borrowers and their families. The case also showed just how prevalent this practice has been, affecting roughly 750,000 families. The case is almost certainly going to lead to significant changes to policies and systems, in order to provide greater protections for borrowers against the practices of lenders.
On the other hand, it has taken the FCA over 2 years to reach its conclusions on this issue which illustrates that securing implementation of a court judgment is rarely easy. Both perseverance and patience are required to ensure a judgment leads to meaningful action and change.