We are now living in difficult financial times and we find ourselves in a situation so radically changed from the beginning of the year as to be almost unrecognisable. In times of change it is natural to look for the familiar. Lending to individuals against the security of a major asset, such as the residential property of the borrower, has always meant the creditor has a right to sell the asset for the repayment of the debt.
Whilst this principle remains true, in a recent response to the current economic climate, a significant new measure has been introduced with a view to assisting a debtor retain his home when in mortgage arrears. This change could mean that it takes longer to successfully issue possession proceedings in respect of residential property and recover the money due to you.
The Civil Justice Council has published a Pre-Action Protocol for Possession Claims based on Mortgage or Home Possession Plan Arrears in respect of Residential Property (the Protocol).
The aim of this Protocol is to make repossession actions by mortgagees of residential property a last resort.
The Protocol forms part of the Civil Procedure Rules and will take effect from 19 November 2008.
Compliance with the Protocol will be mandatory.
A failure to comply with the Protocol will be a breach of the CPR. The consequences of this can be severe. A failure to follow the Protocol is likely to be raised as a defence to any possession claim. The proceedings could be halted or stayed whilst the Protocol is complied with and you are likely to suffer an adverse costs order.
The Protocol provides that the parties should be able, if requested by the court, to explain the steps they have taken to comply with the Protocol. To avoid the adverse consequences of non-compliance and to ensure your actions can be advanced efficiently, we will need to check with you the substantive efforts you have made to follow the Protocol before commencing possession proceedings in respect of mortgage arrears.
The Protocol is specific in its scope. It applies to arrears on:
- First charge residential mortgages regulated by the Financial Services Authority under the Financial Services and Markets Act 2000.
- Second charge mortgages on residential property and other secured loans regulated under the Consumer Credit Act 1974 on residential property.
- Unregulated residential mortgages.
A possession claim means a claim for the recovery of property under Part 55 of the Civil Procedure Rules. Where a potential claim applies to a money claim and a claim for possession the Protocol applies to both claims.
As written, the Protocol does not apply to proceedings pursuant to charging orders. We are seeking clarification whether it applies to actions where liability under a guarantee has been secured by a charge over residential property, as we consider the text of the Protocol is ambiguous. However, holders of such charges should remember that where there is no specific pre-action protocol, parties are generally expected by the Civil Procedure Rules to follow the spirit of the protocols. Consequently, best practice may be to meet the general requirement of this Protocol that reasonable steps should be taken to communicate and provide information in a manner that its clear, fair and reasonable.
Mortgagees should also note that the Protocol does not alter the parties’ rights and obligations; their powers of sale and to appoint a receiver under the mortgage deed are not affected. This right has been affirmed recently by the High Court, which has declared that a mortgagee has the right under its mortgage to sell a property where the proprietor is in arrears without first needing to obtain a court order. This decision has been roundly criticised by the Government as being inconsistent with their policies, as demonstrated by the Protocol, so we would not be surprised to hear more from the Ministry of Justice on this point.
Requirements of the Protocol
The key features of the Protocol relate to:
- Initial contact and provision of information.
- Postponing the start of a possession claim.
- Alternative methods of resolution.
There is a significant obligation on the lender to provide a wide variety of information. In addition to providing the debtor with details of the total arrears, total outstanding on the mortgage and details of interest and other charges payable, the Protocol requires the lender to provide information about dealing with mortgagee arrears, contacting the local housing authority and debt advisors.
The lender should take all reasonable steps to discuss with the borrower the causes of the arrears and whether they are long or short term, his personal circumstances, proposals for repayment and likelihood of repayment in a reasonable time. The Protocol does not give any indication of how long a lender should spend trying to engage a borrower in these discussions, when the problem can often be that the borrower does not respond until steps towards proceedings have been commenced.
The Protocol does provide that all proposals for resolving the problem should be given reasonable consideration. The reasons for any refusal of a proposal should be given by the lender in writing within specified time periods. Where a borrower fails to comply with an agreement, the lender must give 15 business days written warning of its intention to start proceedings if the breach is not remedied. Postponement
The Protocol specifies circumstances where a lender should not consider commencing possession proceedings: if the borrower can demonstrate he is properly pursuing a claim under a mortgage payment protection policy or is taking reasonable steps to market the property and has provided full details of the sale to the lender. The Protocol does list the information a lender should receive from a borrower and provide that the borrower should authorise the estate agent and conveyancer to communicate with the lender. The opportunity to be involved and informed about the progress of the sale will be welcomed by lenders who may be concerned that a sale may not be energetically pursued as a delaying tactic.
A borrower must be given 5 days written notice of a lender’s reasons not to postpone proceedings before the start of a claim.
The objective of the Protocol is that possession claims should be a last resort. NO proceedings should be commenced whilst there is real prospect of settlement. Lenders are required to discuss with the borrower various options to the terms of the mortgage, including term, type and methods of payment.
Guidance for mortgage lenders
Concurrently with the publication of the Protocol the Council of Mortgage Lenders has published extensive guidance for lenders on how to treat customers in arrears and during the possession process. Whilst this guidance does not yet have regulatory status, it provides that compliance with it will be evidence that a lender has treated its customer fairly and in accordance with the Protocol.
The guidance sets out what lenders MUST cover in their policies, other optional provisions and contains good practice examples of both policy and procedure.
We recommend a review of your current policies to ensure they are consistent with this guidance (Industry guidance on arrears and possessions to help lenders comply with the Mortgage Conduct of Business Rules (Ch 13) and Treating Customers Fairly Rules).
Early adoption of the recommended policies and their consistent application by your staff will mean that any case of arrears is handled in a manner consistent with the Protocol from the earliest stage. This will be to your advantage as it will eliminate unnecessary delay to the start of possession proceedings in the event all other reasonable attempts at settlement prove unsuccessful.