The City watchdog recently levied a record charge of £10.5 million on mortgage lender GMAC-RFC after finding the company guilty of unfair treatment of customers in arrears or threatened with repossession.
The Financial Services Authority ordered GMAC to pay a fine of £2.8 million and refunds to customers of £7.7 million. GMAC was found guilty of "serious failings" between October 2004 and November 2008, including excessive and unfair charges that did not reflect administrative costs, failing to take into account customers' circumstances when ordering repayments, inadequate training of staff and failing to consider alternatives to repossession.
The fine imposed on GMAC was partly due to the £45 monthly charge that a borrower receives for going into arrears. The £45 is charged every month until the borrower goes into the black. However the FSA have deemed that charge to be illegal.
That charge is administered by third party processor HomeLoan Management (HML) – part of the Skipton group. HML is an outsourced mortgage servicing provider which manages customer mortgage accounts on behalf of lenders. It provides a white labeled service so customers always believe they are dealing with the lender direct.
Other specialist lenders using HML also have a similar charging structure when it comes to arrears.
One source says: “It was common practice for lenders to follow each other when it came to charging for arrears. Everyone was around a similar market and this will be a question of when, not if, this will apply to other lenders.
“This is causing a mighty problem as lenders and HML do not have the staff resource to look at individuals on a case by case basis. There is also another problem in that some of the original loans will have been sold on by the originating lender. Although those loans are still serviced by HML it has created a tangled web to unravel.”
HML services just over 400,000 borrowers on fort around 30 lenders with the majority operating similar arrears policies to GMAC. Those lenders include Bradford & Bingley, Nationwide (as a result of its merger with Derbyshire and Cheshire building societies), Kensington, Morgan Stanley and former Merrill Lynch lenders Mortgages PLC and Wave. Any borrowers that have fallen into arrears would have been subject to the same or similar £45 monthly charge.
Of those 400,000 customers around 20% will be in arrears already, which means around 80,000 customers are being unfairly charged each month.
The FSA ruling late last year means that theoretically all other “HML” customers that have gone into arrears since 2004 could also be eligible for a refund.
Neil Warman, HML chief commercial and finance officer, says: “We are not able to comment on specific client circumstances but we do work closely with a number of lenders, managing their customer mortgage accounts in line with their lending and administration policies..
“In the event of one of our clients wanting to make a retrospective adjustment to the mortgage accounts we manage for them, then we would work with them to help this take place effectively.”
Other servicers operate a more fair and transparent fee for going into arrears, such as a one off payment of £45 after the borrowers agrees to a plan of action to clear the outstanding debt.
The FSA has stated that it proposes to take immediate action on the monthly arrears fee as they deem it unjust and unfair.
For example a borrower repaying £50 per month of his arrears could see the whole £50 allocated to fees and therefore would never pay off the arrears.
The regulator is consulting this month and industry insiders expect it to become law by the summer while insiders expect it to fine a further five mortgage lenders.
If borrowers feel they have been overcharged they should in the first instance write to their lender. If they are unhappy with the response they should contact the Financial Services Ombudsman. These are regulated mortgage contracts so all the protection provided by the FSA Mortgage Conduct of Business rules apply.
David Hollingworth,a mortgage broker at London & Country, says that the FSA ruling on GMAC-RFC sends a clear message that unfair treatment of those in arrears will not be tolerated and could open the door to those borrowers that feel they have met with harsh charging structures.
“The first step for borrowers would be to establish exactly how they were charged and if they feel it was unfair they have the right to make a formal written complaint to the lender,” he says. “The lender will respond and also outline the process if the borrower is not happy with their findings and even if there is still deadlock, the complaint could ultimately be taken to the Financial Ombudsman. “
Fahim Antoniades, a broker with Mortgage Centre IFA, agrees. “If you feel that you have been unfairly treated by your lender, the first starting point is to read carefully the terms and conditions of your mortgage offer.
“If you are not sure of what the terms and conditions mean, then seek help from the adviser who initially arranged the mortgage. At this point you may feel that the terms and conditions were not explained to you properly; in which case you could lodge a complaint against the advisory firm as an expression of your dissatisfaction. However, this could be a separate issue to how the lender itself has treated you and you may therefore feel a complaint against the lender is also warranted.”
One of the hard parts is working through the paperwork that may have mounted up. Hollingworth says debt charities could be invaluable as a first port of call in establishing what action borrowers may be able to take.
He adds: “If the property has not yet been repossessed then clearly the first concern is to reach a course of action in conjunction with the lender to avoid the need for such a serious course of action.”
Although the FSA doesn’t deal with individual complaints Cerris Tavinor, spokeswoman for the Financial Services Authority, says: “If an individual consumer is worried about their situation they can make formal complaints to that firm. They can ring our own consumer contact service to get more information about the different help that is out there if you are worried about arrears, getting into arrears and how your arrears are being managed. There are bodies that can help and give advice on how to manage with this. “
And she adds: “We completed our investigation into GMAC and published the results of that case. We have made the point publicly that we have referred other lenders to enforcement so other work is carrying on but we can’t talk about individual firms.
“If there is evidence that a firm is doing something wrong then we investigate that firm and take action.
“One of the reasons why we publish enforcement cases is the message that it sends to everybody else in that sector. Every enforcement case is a warning and we have published two earlier reports that look specifically at arrears handling which led to the GMAC case. We published our findings and the point of that is so lenders look at what they are doing and ensure that they are meeting our standards and rules.”
