Exemption from regulation for
buy-to-let lending
5. The Consumer Credit Act 1974 as it currently
stands, that is, as amended by the Consumer Credit Act 2006, does
not achieve the original policy intentions for exempting buy-to-let
lending. The Government never intended to regulate buy-to-let
lending where the loan is secured as a first charge on the property
in question and the owner or relative occupies or intends to occupy
40 per cent or more of the property.
6. Prior to April 2008 the majority of buy-to-let
loans were exempt from regulation under the 1974 Act, which provided
that an agreement was not a consumer credit agreement[4]
if, amongst other things, the credit provided exceeded £25,000.
Section 2 of the Consumer Credit Act 2006 removed this limit with
effect from April 2008, bringing all consumer credit agreements,
regardless of value, into regulation unless specifically exempt.
This potentially would include buy-to-let mortgages secured by
a charge on the property. Section 16 of the 1974 Act does make
provision for exempt agreements which are not regulated by that
Act, but these exemptions are not comprehensive with regard to
all buy-to-let lending (except where the loan is secured as a
first charge on the debtor's own home, in which case that home
would be at risk if difficulties with repayment arose).
7. During the passage of the Consumer Credit
Act 2006 the Government believed that the new business exemption
introduced by that Act would apply to buy-to-let lending. This
exemption excludes from regulation under the 1974 Act consumer
credit agreements where the credit provided exceeds £25,000
and the agreement relates to the purposes of a business. But an
agreement financing a one-off or small-scale purchase of property
is a transaction more accurately described as an investment deal.
As such it would not pass muster in terms of the definition of
'business' in section 189(1) of the 1974 Act. Section 189(2) of
the Act provides that a person should not be treated as carrying
on a business merely because he or she occasionally enters into
transactions belonging to a business of that type. As the Explanatory
Document points out:
"This would effectively exclude from the business
exemption those investors who buy just one or a small number of
buy-to-let properties".[5]
8. Concerns about incorporating investment agreements
within the business exemption were first raised by the credit
industry when the latter was considered in detail during preparation
of the draft Consumer Credit (Exempt Agreements) Order 2007. On
re-examining the matter the Government agreed with the industry's
assessment.
9. The Government's view is that buy-to-let is
inherently a commercial venture which contains an element of risk.
Such risks are no different to those incurred by other types of
business and should be treated accordingly. [6]
We believe this is a reasonable position to take.
10. There is currently a transitional arrangement
in place which keeps buy-to-let lending over £25,000, which
is secured on the property and satisfies the less than 40 per
cent occupancy test, out of regulation until the final Order is
made. Buy-to-let loans at or below £25,000 taken out before
the proposals in the draft Order come into effect (should the
House approve) will continue to be regulated as now, regardless
of exemption. There are today very few, if any, loans for buy-to-let
purposes of £25,000 or less.
11. The draft Order proposes inserting a new
section 16C into the 1974 Act which would create an exemption
from regulation under that Act for consumer credit agreements
for buy-to-let purposes of any value meeting specified conditions
(this would bring about equality in the buy-to-let market, since
the existing land purchase exemption in section 16 of the 1974
Act is not subject to a financial limit). Certain consequential
amendments to section 82 of the 1974 Act would also be required.
Section 82 deals with situations where an existing agreement is
varied or supplemented by a later agreement. The Explanatory Document
says:
"It is existing Government policy that such
loans should be unregulated and there is no evidence at the present
time to suggest otherwise. The vast majority of buy-to-let loans
are already exempt from regulation under or by virtue of existing
exemptions in section 16, 16A and 16B of the 1974 Act, including
the new business exemption which came into force in April 2008.
This proposal therefore aims to provide consistency in the regulatory
treatment of buy-to-let loans".[7]
12. An exemption for buy-to-let lending does
not mean that the debtors involved are unprotected, since the
relevant agreements come within section 140A of the 1974 Act which
allows for credit agreements to be challenged in the courts on
the grounds that the relationship between the creditor and debtor
is unfair.
Clarification on the giving of
statements for fixed-sum credit agreements
13. One of the intentions behind the Consumer
Credit Act 2006 was to ensure that a creditor under a regulated
agreement for fixed-sum credit[8]
gives a debtor regular statements each covering a period of up
to one year. These should be given within 30 days of the end of
the period to which they relate and should run consecutively.
However, the requirements of the 2006 Act (which amends the 1974
Act) when taken together with regulation 11 of the Consumer Credit
(Information Requirements and Duration of Licences and Charges)
Regulations 2007 (which themselves were made under an amendment
to the 1974 Act introduced by the 2006 Act) defeats the policy
intention. The existing wording in the 2006 Act does not allow
for the provision in the 2007 Regulations which gives the creditor
30 days to send the statements.
14. The draft Order therefore proposes to revoke
regulation 11 of the 2007 Regulations and amend section 77A of
the 1974 Act (as amended by the 2006 Act) by providing that a
creditor under a regulated fixed-sum credit agreement should give
the debtor statements covering consecutive periods of not more
than one year and that such statements must be given within 30
days of the end of the period to which they relate. The intention
is to remove the ambiguity which currently exists and provide
clarity to creditors about the period to be covered by the statements
and the time within which they must be given to debtors.
Inclusion of definitions of 'payments'
for the purpose of issuing notices of sums in arrears
15. The Consumer Credit Act 2006 required creditors
to provide for debtors under certain regulated fixed-sum and running-account
credit agreements, and certain regulated consumer hire agreements,
specific information about credit agreements at given points in
time, in particular notices of sums in arrears. A number of conditions
need to be met before this obligation arises, some of which include
the word 'payments'.
16. The original policy intention was that 'payments'
should cover only those scheduled instalments or repayment sums
and hire payments as provided for under the agreement. However,
the word 'payments' was not defined in the 2006 Act. This omission
means that 'payments' could be interpreted more widely than was
meant and include ad hoc payments which might trigger first
notices of arrears more quickly than would otherwise be the case.
17. The draft Order proposes that 'payments'
for the purpose of issuing notices of sums in arrears be defined
as those payments made at 'predetermined intervals provided for
under the terms of the agreement'.[9]
In the case of applicable regulated consumer hire agreements the
definition is 'any payments to be made by the hirer in relation
to any period in consideration of the hiring to him of goods under
the agreement'.[10]
4 Defined as 'An agreement between a debtor and a creditor
by which the creditor provides the debtor with credit of any amount'.
See ED p1. Back
5
ED, Annex A, p13, para9. Back
6
ED, p7, para23. Back
7
ED, p7, para22. Back
8
Fixed sum credit agreement means any other facility under a consumer
credit agreement (other than under running account credit agreements)
whereby the debtor can receive credit whether in one amount or
in instalments. The most common example is a single loan advance.
Back
9
ED, p8, para17. Back
10
Ibid. Back
