Mortgage arrears and access to mortgage finance - Treasury Contents

Written evidence submitted by Mr Fulcher


  1.  The following submission, in response to the Treasury Select Committee's call for submissions, made 17th June, 2009, submits evidence of widespread consumer detriment experienced as a result of practices in the "sub-prime" mortgage market which are systemic, in breach of regulatory instruments, and by consequence therefore unlawful. These practices, as will be identified, fall within the oversight and compliance responsibilities of the FSA, the OFT and FOS.

  2.  The scale of consumer detriment is both unparalleled & appalling. The CML[35] figures serially underestimate the real scale of repossession action. The repossession figures will typically only reveal 1st charge repossessions, will not reveal how many repossession claims are brought in relation to 2nd charge mortgages which are prevalent in the sub-prime sector, will not reveal how many possession claims are "in the pipeline" and will also never fully disclose the vast quantity of suspended possession orders which are waiting now to be converted, alas all to easily, to full possession orders.

  3.  The submission will present three main points; (i) systematic abuse of consumers of sub prime mortgages in origination, and subsequent management and operation by TPAs (Third Party Administrators); (ii) regulatory failure, not in the substance of the regulations themselves (clarity prevails), but in their enforcement, chiefly the responsibility of Financial Services Authority and the Office of Fair Trading and finally, (iii) the inability or unwillingness of the County Courts to exercise application of the law in relation to examining the terms and conditions of the contracts, due scrutiny of the defendant's defence statements, examining fully the claimant's locus standi and examining the bona fides of the claimant's alleged calculations of arrears which are often substantially comprised of unlawful and therefore unrecoverable charges.



  4.  Almost without exclusion most sub prime mortgages originate through a broker. These brokers have clear responsibilities under law. The lenders also are governed by responsibilities for the broker's actions.[36] It is sadly far from uncommon that brokers act with cavalier disregard for the consumer. It is paramount that the deal is struck and the commission is paid. The commission is then added on to the loan, and compound interest is added over the lifetime of the mortgage.

  5.  The consumer of such products will inevitably pay a higher rate of interest (between 8 and 14% is not uncommon) on even relatively small 2nd charge mortgages. The assumption has hitherto been that the consumer in question is a higher category of risk. Often these will have been the very consumers who have fallen foul of punitive and unlawful charges in other aspects of their finances, thus resulting in negative, and sometimes unlawful, entries on their credit references. It is worth noting that the vast majority of bank charge and credit card or other personal finance settlement claims have not resulted in a full removal of default notices applied to the consumer's credit record, thus artificially creating this "higher risk category" of consumer. In this respect the consumer is therefore pressurized (if not forced) into the "specialised" sector of the market for his, her or their mortgage.

  6.  Further, it is never fully and transparently disclosed in plain and intelligible terms that the consumer has contracted to a contract which provides that the mortgage will then be "marketed" and sold as an investment opportunity. The typical attraction of these "notes" for the investor are the high rates of interest, and crucially, their early redemption period. To clarify for the committee: early redemption in respect of these mortgages does not usually mean that the borrower is able to pay off the mortgage earlier than the stipulated term. It typically means asset stripping the equity in the mortgagee's home through repossession. The lender thereby has a vested interest in pursuing an aggressive repossession strategy. At no time has any consumer of these mortgage products consented either expressly or otherwise to the subsequent sale of their mortgage, nor typically was he or she ever informed.[37] The issue of securitization and subsequent consumer detriment has been submitted before this committee in prior submissions on the banking crisis.

  7.  Terms are not individually negotiated, and express consent to all terms whether lawful of not is not possible.

Operation and performance

  8.  There is growing disquiet concerning the treatment of consumers in the sub prime sector.[38] The anecdotal evidence, behind which lies a real life story, is also growing. The costs of family breakdown as a result of malicious and often unlawfully premised repossession will mount if serious regard is not in the first instance given to lender's lawful responsibilities, and the duty of enforcement by the various regulatory authorities and services.

  9.  The scale of misconduct and consumer detriment is enormous. In a submission of 3000 words it is impossible to even begin to scratch the surface of the seriously deficient maladministration of consumer accounts, the mistreatment of consumers including those who are able to meet their onerous obligations, and the treatment of those who fall short of meeting theirs. The mortgage products are deliberately designed to result in alleged default, typically within a three to five year period of origination.[39]

  10.  Consumers of these products will variously and typically experience the following:

    (a) failure of notification of the fact that their mortgage has been securitized usually within three to six months;

    (b) absence of consent to a disposition of property as mandated by law

    (c) failure to lawfully perfect the sale of the mortgage

    (d) Failure of notification that by default any sub prime mortgage is placed on a block building insurance policy even if the consumer of the mortgage product has valid buildings insurance; compound interest is charged thereon;

    (e) alleged none payment where payment has been tendered;

    (f) alleged late payment where payment has been tendered upon date due;

    (g) falsely alleged shortfalls in payments;

    (h) failure to change payment due date to reflect that not all consumers are paid on regular dates or even the same date as collection is deemed due;

    (i) false entries onto consumer accounts regarding alleged failed payments;

    (j) failure to correct such entries after complaint;

    (k) failure to amortize the debt with payments made over and above the interest due, thus creating a higher level of compound interest over the term of the mortgage and increasing over time the likelihood of default;

    (l) failure to acknowledge consumer complaints;

    (m) failure to respond within a reasonable time scale to consumer complaints;

    (n) failure to comply with Data Protection Subject Access Requests;

    (o) willful ignorance of duties under CPR 31.6 in respect of planned or listed litigation;

    (p) commission of offences against both the Telecommunications Act 2003 and the Harassment Act 1997 in the form of unwarranted and intrusive telephone calls often designed to cause embarrassment for example with frequent calls made to the consumer's workplace; unlawfully threatening repossession via a telephone call;

    (q) routine monthly access to and entry upon consumers credit reference files;

    (r) Unlawful and punitively raised charges with no prior notification of their application; compound interest applied thereon;

    (s) Failure to provide a breakdown of solicitors cost; dumping said costs onto arrears and applying compound interest thereon;

    (t) undue haste in litigation and claiming to observe the CJC pre action protocols but failing absolutely to do so.

    (u) Threatening consumers with costs which are at the discretion of the court;

    (v) Breaches of the FSMA (2000); Mortgage Conduct of Business (MCOB) rules; the UTCCRs (1999) The Unfair Consumer Practices Directive (2008) and where applicable the Consumer Credit Act (2006); breaches of the criminal law in failure to register that a disposition of land has taken place (s.2 Property Act, 1989, s.127 Land Registry Act 2002); breaches of s.1 and s.5 of the Fraud Act, 2006.

    (w) In litigation, failure to seek possession only as a last resort; failure to serve documents upon the defendant; failure to offer to capitalize genuinely constituted arrears; failure to accept temporarily reduced payments without inferring delinquency; failure to accept payments from customers in arrears where the full alleged arrears is not tendered, failure to refund unlawfully applied charges and compound interest applied; failure to waive charges where a performing arrangement for arrears clearance is in place;

    (x) In suspended cases, the application of charges without notice in excess of the overage paid by consumers to clear their arrears; misrepresentation to the courts that such arrangements will clear the arrears when typically they will not, as a consequence of yet further charges disguised with various nomenclature as arrears management fee, litigation fee, arrears interest, interest charged and so on;

    (y) Willful exaggeration of the consumer's genuine level of arrears, which may be typically half of the overall total claimed.

Post possession treatment

  11.  The willful mistreatment of consumers does not end with possession. Rather this is just the beginning. Consumers will be faced with costs in respect of: eviction; clearance and storage of goods; locksmiths; often unnecessary "improvement" to the property; valuation fees; estate agency costs and ancillary legal fees; finally there is the grossly excessive "early redemption figure" which in absence of a true redemption should not be charged at all but in practice is used to strip the remaining equity out of the property; post—possession harassment of consumers is sadly as common as the harassment endured pre-possession.

  12.  Multiple anecdotal evidence of such treatment is available in the form of often desperate postings made to consumer web sites. Such information is readily available to committee members; see for example the consumer action group's website.

Regulatory failure

  13.  A strange conundrum arises when one considers the regulatory framework that binds the operation of consumer contracts including mortgages. Historic and recent legislation and regulations, prima facia, provide the consumer with a great deal of protection from unfair terms, contractual irregularities or breaches and unlawful conduct by the credit provider. The conundrum is a simple and powerful one. How is such treatment of consumers even possible?

  14.  The FSA took on responsibility for mortgage regulation in 2004. FSA Statutory objectives include securing the appropriate degree of protection for consumers (The Financial Services and Markets Act 2000 (Part 1, Section 3)

  15.  The FSA also regulates by reference to its own principles of good regulation amongst which are that a firm must conduct its business with due skill, care and integrity; observe proper standards of market conduct and pay due regard to the interests of its consumers and treat them fairly. Finally a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.

  16.  The FSA's own performance report has nine high level indicators by which to assess performance in achieving its strategic aims. Indicator four is particularly instructive: (4)Firms are financially sound, well managed and compliant with their regulatory obligations;

  17.  Furthermore in reference to the FSA Treating Customers Fairly—outcomes for consumers, July 2006.

    "Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale"


    "Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint."

  18.  If a firm breaches FSA's rules, enforcement action may follow. If enforcement action is taken the FSA has a range of disciplinary, civil and criminal powers which it can use against regulated and non-regulated firms. The sanctions include financial penalties, removal of authorisation or even criminal prosecution in cases of misconduct.

  19.  Additionally, The Unfair Commercial Practices Directive (UCPD 2008) [40]seeks to protect consumer interests from unfair business-to-consumer commercial practices. In particular, commercial practices will be unfair if they are misleading (this includes both acts and omissions) or aggressive.

  20.  Further the UTCCRs (1999) provide that: (a) a consumer may challenge a standard term in an agreement on the basis that it is "unfair" within the Regulations and therefore not binding on the consumer.

  21.  The scale of consumer detriment by consequence of the practices identified in paragraph 10are part of the corporate culture of the so called "sub-prime" market. Such practices represent clear contempt for the rules and regulations the FSA in conjunction with the OFT and the FOS have laid down.[41] Regulation is clearly insufficient. Only the FSA, together with the FOS and the OFT can give consumer protections real effect. Qui custodientipsoscustodes?

  22.  There has been much recent discussion elsewhere that the regulatory systems and authorities have failed in their primary duties of oversight and compliance and that better governance is needed.[42] It is submitted before this committee that where the law is clear then observation of the various laws and regulations must be enforced. In absentia the rule of law and the sovereignty of parliament are subjugated to the will of the finance industry, a clear case of the tail wagging the dog.

  23.  The regulatory instruments are clear but seem unable to prevent breaches so as to lack effect. The FSA seems unable to sanction firms breaching its own regulations, often arising from EU directives, which if inadequately applied lay the state itself (or various emanations thereof) potentially open to damages claims, chiefly under the Francovich principle.[43]

The role of the County Courts

  24.  The FOS may take many months to investigate individual complaints against traders[44] and since the process of repossession is often very swift, it invariably falls to the courts to ensure the application of the overriding objective of the Civil Procedure Rules.

  25.  In many, if not all instances, the consumer is a litigant in person, in ignorance of the law. Anecdotal evidence suggests that the litigant in person does not receive fair treatment before the courts, with defence statements summarily dismissed in some cases.[45]

  26.  In possession claims the courts rely on four outmoded assumptions. These are as follows. (a) that repossession doesn't benefit the lender and that therefore the lender will avoid it whenever they can; (b) that only people who have built up unsustainable arrears will be repossessed; (c) that the alleged arrears are always accurately calculated; (d) that where breaches of an arrangement are made these are borrower breaches and never lender breaches.

  27.  Under [2000] EUECJ C-240/98[46] courts are mandated by operation of this decision to assess the fairness of the terms of a contract on the consumer's behalf, even if the consumer does not ask the court to do so. On this premise alone the legality of many thousands of possessions which have already taken place is subject to challenge. There has been a visible error in law where courts have not assessed the fairness of the terms of the mortgage contract.

  28.  The courts also fail in the primary duty to place claimants to a strict burden of proof that they retain locus standi following securitisation of mortgages in the mortgage pool. Possession is a drastic measure of last resort and should only take place where the locus standi of the claimant is fully satisfied. References to the Land Registry entry of charge and the mortgage deeds are insufficient given the practice of securitisation, where the originator of the loan clearly states in their Offering Circular that they do not "currently intend to effect any registration at the Land Registry of England and Wales."[47]

  29.  Further the court sanctions an abuse of its own process when it allows suspended orders to be made or suspended orders to become full possession orders. Without full satisfaction of the claimant's locus standi there can be no right of claim.


30.   This submission has been presented in a personal capacity by the witness, as a consumer of a "sub-prime" mortgage product.

  31.  The overall impact of these widespread practices is that consumers are being serially and unlawfully overcharged, treated with contempt and subject to reprisals when making complaint. They are then ultimately (and often unlawfully) repossessed, in addition to which the equity is then stripped from their homes with hugely disproportionate early redemption charges, following on from repossession. Often their only valuable asset is knowingly undersold in order to realize any cash value remaining, in an uncertain property market, not for the benefit of the former owner, but for the benefit of the possessing party, and on the behalf of those for whom they act, as a consequence of the securitization process.

  32.  Furthermore, the Financial Services Authority and the Office of Fair Trading have failed in their duty to regulate effectively these firms, the Financial Ombudsman Service is too slow to act on consumer complaints and enforce the regulations in this area, and the courts themselves consistently fail in their duty to examine the fairness of standard terms in the terms and conditions of the relevant mortgage contracts as they are mandated by virtue of Murciano Quintero (Environment and consumers) [2000] EUECJ C-240/98 (27 June 2000).

  33.  The courts place too much faith in outmoded concepts of the "honourable" wronged lender seeking a last resort lawful remedy for breach by a "delinquent" consumer, when in fact it is the lender that is delinquent in origination and subsequent operation and performance of the contract.

  34.  The devastating cumulative impact is as follows; family breakdown, homelessness, unemployment and increased child poverty and neglect. Few studies have been conducted but one such study was reported as follows: Understanding the social consequences of mortgage repossession by Sarah Nettleton, Roger Burrows, Jude England and Jenny Seavers, and was published on behalf of the Joseph Rowntree Foundation by York Publishing Services Ltd.[48] These are the inevitable but entirely avoidable consequences of the drive for possessions neither mandated in law or in any meaningful sense fair to the consumer. The regulations are adequate (though far from perfect); compliance with the regulations is woeful. Exhortation has failed. It is time for the "big stick" of compliance enforcement.

June 2009.


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36   The Non-Status Lending Guidelines for Lenders and Brokers issued by the OFT in July 1997 and revised in November 1997 apply to all secured loans made to "non-status borrowers". The Guidelines provide guidance as to the activities of lenders and brokers in the non-status secured lending market in areas such as advertising and marketing, loan documentation and contract terms, selling methods, underwriting, dual interest rates, flat interest rates and early redemption payments. According to the Guidelines, advertising and other promotional material must be clear and easily legible and should not be misleading, and the Guidelines prohibit unfair sales tactics. Brokers are obliged to disclose at the outset of the transaction their status with regard to the borrower and the lender, together with details of any fee or commission payable to them as broker or if they are tied to a particular lender. Lenders must take all reasonable steps to ensure that brokers and other intermediaries regularly marketing their products do not engage in unfair business practices or act unlawfully, that they serve the best interests of the borrowers and explain clearly the documentation and consequences of any breach or early repayment by the borrowers. The actions of any broker or other intermediary involved in marketing a lender's products can jeopardise the lender's fitness to hold a consumer credit licence, and the Guidelines make clear that lenders must take all reasonable steps to ensure that such brokers and other intermediaries comply with the Guidelines and all relevant statutory requirements. This is so even if the lender has no formal or informal control or influence over the broker. Back

37   "The effect of (i) not giving notice to the Borrowers of the sale of the relevant Loans and their Collateral Security to the Issuer and the charging of the Issuer's interest in the Loans and their Collateral Security to the Trustee and (ii) the charge of the Issuer's rights thereto in favour of the Trustee pursuant to the Deed of Charge taking effect in equity (or extending over the Issuer's beneficial interest) only, is that the rights of the Issuer and the Trustee may be, or may become, subject to equities as well as to the interests of third parties who perfect a legal interest prior to the Issuer or the Trustee acquiring and perfecting a legal interest" SPML Offering Circular to Investors 8 August 2005 p.69 Back

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39   Prior to enforcement, the Notes will be subject to mandatory redemption in part on each Interest Payment Date in accordance with Condition 5(b) (Mandatory redemption in part of the Notes). This mandatory redemption in part will be funded primarily by scheduled principal payments by the Borrowers under the Loans and principal prepayments (whether voluntarily by the Borrowers, as a result of enforcement of security in respect of the related Property or otherwise) and/or by Loan Sale Principal Proceeds not applied to purchase Additional Loans. (Source Mortgage Funding PLC 2008-1 Prospectus, 18th March 2008) p.14. Back

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47   SPML/SPPL Offering Circular to Investors 8 August 2005 p.69 Back

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