Consultation launched on 'second charge' lending

16 February 2009



The Office of Fair Trading (OFT) has launched a consultation on draft guidance for businesses involved in second charge lending, which it believes can lead to a rise in repossessions. The process involves consumers taking out a loan against their home, despite already having a mortgage, a practice the OFT believes must be conducted fairly.

It is suggested that companies involved in second charge lending must be up-front about the management of arrears and defaults by improving their provision of customer care. The consultation follows calls from the Financial Services Authority for lenders to treat customers in mortgage arrears fairly, which includes giving them a written outline of standard procedure.

A standard for lenders to adhere to will arise from the OFT consultation, with legal experts best-placed to advise on how this will impact individual circumstances. Responses to the consultation are required by May 8th, with the OFT believing the guidelines will be a "welcome step in the right direction".

Pat Davies, partner in the property team comments: "Most mortgage lenders who have a first legal charge on residential dwellings belong to the Council of Mortgage Lenders which already has a code in place for dealing with borrowers in default with an obligation to deal with them fairly; many second chargees do not belong to the Council of Mortgage Lenders which is why a consultation is being suggested.

"The situation between a First Charge and a Second Charge is very different. A First Charge is normally put in place to facilitate the purchase of the Property whereas the Second Charge is normally put in place to facilitate additional borrowing such as credit card debts or business or other loans and tends to be for a smaller amount at a higher rate of interest.

"Quite often borrowers do not fully appreciate that a relatively small loan secured on their Property can result in them losing the Property or that a bank mortgage could cover other bank borrowings. In a falling market the Second Chargee is more vulnerable as if the property is sold, the First Chargee has to be paid off first. For this reason the Second Chargee tends to have less patience with a Borrower in a default situation, puts pressure on a borrower to pay them, and if the Borrower fails to do so, tends to act quickly on the basis that interest is accruing at a higher rate and if a Property is sold quickly then they may realise some monies from the sale.

"It is for this reason that Second Chargees tend to instigate more repossession proceedings than First Chargees and why consultation is being sought."

If you require legal advice, for either your private affairs or organisation, please contact Buckinghamshire based B P Collins Solicitors or give us a call on 01753 889995.

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