CML Statement of Practice January 1997
Introduction
1. This Statement provides an overview of how mortgage lenders currently deal with
mortgage arrears and possession cases. The facts of each arrears and possession
case are unique, and each case needs to be treated individually. Mortgage lenders
adopt flexible procedures for the handling of arrears and possession cases which
are aimed at assisting the borrower as far as possible in his or her particular
circumstances. Individual practice will, of course, vary between lenders depending,
in particular, on whether they operate on a centralised or decentralised basis.
This Statement describes how lenders deal with mortgage arrears; the procedures
adopted when handling possession cases; the subsequent sale of property in possession
and finally the recovery of any outstanding debt. Individual circumstances might
arise in which action outside those referred to in this Statement may need to be
taken.
Mortgage Arrears
General Principles
2. The following general principles are relevant to the question of mortgage arrears
-
(a) When a borrower falls into arrears, the problem should be handled sympathetically
and positively by the lender. The lender's first step will be to try to contact
the borrower to discuss the matter.
(b) As soon as financial difficulties arise, the borrower should let the lender
know as soon as possible.
(c) Once contact has been established, a plan for dealing with the borrower's financial
difficulties and clearing the arrears will be developed consistent with the interests
of both the borrower and the lender.
(d) Possession of the property will be sought only as a last resort when attempts
to reach alternative arrangements with borrowers have been unsuccessful. The borrower
will remain liable for the full mortgage debt.
The Handling of Arrears - Initial Action taken by Lenders
3. Mortgage lenders or their agents may use the following administrative procedures
for dealing with arrears -
(a) The lender's first step will be to try to contact the borrower, for example,
by letter or telephone.
(b) The lender may seek a meeting with the borrower to discuss the situation and
examine ways to resolve the problems. Alternatively, this may be done via the telephone
or letter.
(c) Once contact has been established, a plan for clearing the arrears will be developed
consistent with the interests of both the borrower and the lender.
(d) If contact cannot be made with the borrower and payments continue to be missed,
legal action to recover the arrears or take possession of the property may be necessary.
Alleviating Arrears Problems
4. Lenders have the following measures which they can use to help some borrowers
in arrears difficulties -
Extend the Term of the Mortgage
(a) In the case of a repayment loan the term of the loan can be lengthened, although
in most cases this does not make a significant difference to the monthly repayments.
Change the Type of Mortgage
(b) An investment backed mortgage may be changed to a repayment, or interest only,
mortgage with a subsequent reduction in monthly outgoings. The borrower should also
take appropriate professional advice.
Defer Payment
(c) Payment of part of the interest may be deferred for a period. This may be particularly
appropriate where there is a temporary shortfall of income (for example, because
of an industrial dispute or a temporary illness), or where there has been a rapid
increase in interest rates. Lenders may in certain circumstances be willing to accept,
for a reasonable period of time, the most the borrower could reasonably afford if
this is in the best interests of both the lender and the borrower. However, this
is not a solution where, because of a permanent reduction in income, a borrower
is unable to afford anywhere near the full mortgage repayments and there is little
prospect of an improvement in the situation in the foreseeable future.
Capitalise Interest
(d) Linked to (c) is the possibility of capitalising interest. This may be appropriate
where arrears have built up but full monthly repayments can be resumed. The amount
outstanding (capital sum and arrears of interest) may be rescheduled and repaid
over the life of the loan. This might have an impact on the interest rate levied,
whether a repayment vehicle will repay the loan in the case of an investment backed
mortgage and eligibility for mortgage interest relief at source (MIRAS). Such an
approach is unlikely to be adopted where the borrower has in the past failed to
adhere to an alternative payment arrangement.
5. When agreeing alternative repayment arrangements, lenders will carry out an appraisal
of a borrower's ability to meet the repayments. In some cases, the arrangements
might be made for a specific period of time, after which an assessment is made as
to whether the circumstances have changed to the extent that the arrangement can
be varied.
6. In addition, lenders try to ensure that the borrower is aware of the availability
of social security benefits which might apply such as income support to meet part
of the mortgage interest repayments where a borrower is unemployed. Where the borrower
has a multiple debt problem, the lender might suggest that the borrower contact
a Citizens Advice Bureau or debt advice agency. At the borrower's request and with
the borrower's consent, the lender will liaise wherever possible with a debt counseling
organisation, for example, Citizens Advice Bureaus, money advice centres or the
Consumer Credit Counseling Service.
7. In the vast majority of cases these approaches, together with the efforts of
the borrower, are sufficient to prevent a minor arrears problem from becoming a
major problem leading to possession. It is significant that while many people fall
into arrears for a short time, a much smaller proportion have large arrears and
a very small proportion result in possession.
8. Where mortgage arrears have accrued on an account, lenders recognise the need
for the account to be closely administered by staff with relevant expertise in dealing
with borrowers experiencing repayment difficulties. Details of the mortgage account
may be transferred to the lender's specialised mortgage arrears department, where
the staff would liaise directly with the borrower. Alternatively, the account may
be administered by the local branch, with overall monitoring by the lender's central
arrears department. The borrower would be contacted to establish why the mortgage
repayments were no longer being made, whether the borrower's circumstances had changed,
for example, if the borrower was no longer employed, and if an alternative payment
arrangement could be agreed. A record of the mortgage arrears may be held by a credit
reference agency.
The Levying of Charges on Accounts in Arrears
9. In recent years, lenders have developed effective administrative and forbearance
procedures to deal with cases where the borrower is unable to meet the mortgage
repayments in full. A great deal of time and resources has been devoted to ensuring
that these procedures operate to assist defaulting borrowers remain in their homes.
Taking into account the additional costs which might be incurred in administering
accounts in arrear, lenders may levy a fee on the borrower's account to meet a proportion
of these costs.
10. However, lenders also recognise the difficulties facing borrowers who are experiencing
problems in meeting their mortgage repayments. If a fee is levied on an account,
it usually represents the reasonable cost of the additional administration required.
When fees are charged, these may be on either a monthly or quarterly basis. Alternatively,
lenders may charge only where certain administrative procedures have been carried
out, for example, a home visit by a money adviser (employed by the lender) or where
legal proceedings have been initiated.
11 . In practice, lenders advise borrowers of any fees which might be charged either
prior to the fee being levied or, when the fee is in respect of services, prior
to the services being provided. Lenders may also advise borrowers when they take
out a mortgage that fees may be charged to the account if it falls into arrear.
Information on any fees is usually incorporated in mortgage documentation or published
tariffs.
12. In many cases where borrowers are experiencing difficulties in meeting their
mortgage repayments, an alternative payment arrangement may be reached between the
lender and the borrower. If an alternative payment has been agreed, and is being
adhered to by the borrower, lenders may either cease levying a fee on the account
or continue to charge fees until the account has been brought up to date.
Possession
Methods of Obtaining Possession
13. Possession of a property will be sought only as a last resort when all attempts
to reach alternative arrangements with the borrower have been unsuccessful. A lender
may obtain possession of a property in three ways -
(a) By Court Order
When pursuing possession proceedings through the courts, lenders must adhere to
all the legal requirements and procedures to enforce their security, a number of
which give considerable protection to the borrower. Proceedings may be suspended
should the court consider that a borrower may be able, within a reasonable time
period, to pay any sums due under the mortgage. The execution of the possession
order may be postponed for a time to allow the borrower to secure alternative accommodation.
(b) By Voluntary Agreement with the Lender
A borrower who has fallen into arrears and who has little prospect of repaying such
arrears may reach an agreement with his lender to hand over the property to the
lender without the need to obtain a court order. A borrower may also be asked to
sign a voluntary possession declaration to confirm the agreement, which would make
it clear that mortgage interest together with other charges will continue to accrue
until the property is sold. A voluntary surrender may result in an earlier sale
of the property than would be the case with court proceedings.
(c) Surrender (or Abandonment) by the Borrower without Notifying the Lender
In cases where a borrower has failed to discuss his mortgage arrears problems with
the lender, or where suitable arrangements have not been reached between the lender
and borrower, a borrower may simply vacate the property without advising the lender;
often keys are sent to the lender, this being possibly the first intimation that
the property has been surrendered. In such circumstances, the property would be
sold by the lender. Again the borrower is liable for the total debt including mortgage
interest which accrues until the property is sold.
Irrespective of how the property is taken into possession, the borrower will remain
liable for the outstanding debt including any accrued interest and charges between
the date of possession and the date of sale.
14. In some cases borrowers who have had their properties taken into possession
may seek a mortgage on another property. Potential borrowers should not conceal
the fact that they have defaulted on a previous loan. The subsequent lender will
be aware of the previous mortgage either as a result of enquiries of the original
lender or the CML Mortgage Possessions Register which lists borrowers who have had
their properties taken into possession.
Administrative Aspects
15. Whilst lenders operate different administrative procedures to deal with possession
cases, the following procedures are common -
(a) Should direct contact with the borrower not result in an arrangement (for example,
an alternative payment arrangement) which would enable the borrower to remain in
the property, then solicitors may be instructed to start possession proceedings.
This is usually the only course of action available to the lender by that time.
(b) In some cases, further follow-up contact may continue to be made up until, and
after, the court hearing, every effort being made to encourage the customer to discuss
suitable repayment arrangements and avoid the need for possession.
(c) Instructions for a warrant to be issued for possession are implemented by the
lender, after a full review of the borrower's file by a person fully aware of the
facts, and a final letter or telephone call to the borrower.
(d) Before taking possession, a lender may liaise with the relevant local housing
department. The borrower may also be advised to register on the local authority's
list as soon as possible. Lenders recognise that it is important to give local authority
housing departments as much notice as possible where borrowers and their families
might need to be re-housed. However, this has to be balanced against the possibility
that alternative arrangements might be reached between the lender and borrower which
would enable the borrower to remain in the property. The timing of providing advice
to housing departments will vary from case to case and lenders will only take this
course of action with the consent of the borrower.
(e) On taking possession, the Court Officer may be accompanied by the lender's representative,
after which the property will usually be put on the market as soon as possible to
minimise the mortgage interest continuing to accrue on the account. A record of
the possession may be held on the CML Possessions Register.
CML/Government Statement on Arrears and Possession Procedures
16. In December 1991, after detailed discussions with the Government, the CML reaffirmed
that it is the policy of lenders to take possession only as a last resort, and to
handle arrears problems efficiently and sympathetically. A formal announcement was
made by the Chancellor of the Exchequer in the House of Commons and at a CML Press
Conference on 19 December 1991. The announcement referred to the fact that -
(a) Where borrowers have suffered a significant reduction in their income but are
making a reasonable regular payment, lenders do not seek to take possession.
(b) In the knowledge that income support will in future be paid direct, lenders
will not take possession in cases where mortgage interest payments are covered by
income support.
17. From October 1995, income support has been paid by the Department of Social
Security at a "standard rate" of interest, which may be less than the interest rate
charged by the lender. Borrowers will need to make up any shortfall in the mortgage
repayment. Some lenders have decided not to participate in the direct payment scheme.
In these cases, the borrower will be responsible for passing on the income support
for mortgage interest payment to their lender.
Sale of Properties in Possession
18. When selling properties which have been taken into possession lenders are under
a duty to obtain the best price reasonably obtainable. A lender is not bound to
postpone the sale in the hope of obtaining a better price at some future date; however,
the lender should allow sufficient time to permit, for example, proper advertising
so that the best price obtainable may be achieved. Mortgage lenders generally use
the following administrative procedures for selling properties which have been taken
into possession:
Administration
(a) The sale may be dealt with either via a lender's in-house department or through
a separate property management company employed by the mortgage lender. Dedicated
staff are responsible for coordinating the sale of properties in possession which
will include reviewing the offers received from potential purchasers as well as
monitoring the condition of these properties and their valuation.
Valuation
(b) A valuation of the property is obtained from either one or two qualified surveyors
and another from the appointed estate agent. Prices are usually reviewed every three
to four months and more often when the circumstances justify a revaluation.
Estate Agents
(c) Properties are usually marketed through an estate agent in the immediate locality
of the property being sold. Agents may advertise properties in the local press,
with such advertisements being repeated as and when necessary. Mail shots and national
advertising may also be carried out in some cases. In general, lenders do not market
these properties as "repossessed properties"; in many cases estate agents are specifically
instructed not to do so.
Report on Activity
(d) Estate agents are usually required to report on activity every four to six weeks
if a property remains unsold. The estate agent will notify a mortgage lender of
any offers received. Only when satisfied that the best price has been obtained,
would the estate agent recommend this offer for acceptance. If the offer is substantially
below the asking price, the agent must provide supporting evidence to suggest that
this would be the best offer obtained. In practice, all offers are accepted or declined
promptly. Where there are a number of very close offers on a property, a sealed
bid procedure may be carried out whereby the person putting forward the best offer
would be the successful purchaser.
Visits to the Property
(e) The agent will usually visit the property on a regular basis and ensure that
any repairs and maintenance to the property are carried out and that the property
is secure. When properties are first put up for sale, mortgage lenders will usually
arrange that essential repairs, cleaning and tidying of the garden are carried out.
Whilst the estate agent will take care of minor repairs which are identified on
the regular visits, other repairs usually require the approval of the mortgage lender.
Where this work is carried out, estate agents will be required to obtain competitive
estimates. Prospective purchasers will normally be accompanied by the agent when
viewing a property.
Auction
(f) Properties in possession may be sold via auction. These properties are reviewed
relative to sales experience and the length of time on the market. There are occasions
when properties may be sold by auction because either the auction is specifically
targeted at the type of property in question, eg a period type of residence, or
the property will generally appeal to the speculator market because of its condition.
Such properties are referred to an appropriate auctioneer. A catalogue would be
issued and the properties are available for viewing. A reserve price is usually
based on information relating to the number of viewings and general level of interest.
A reserve price is set several days before the auction following consultation with
a surveyor on the valuation of the property.
Proceeds of Sale
19. Following the sale of a property in possession, the proceeds of sale will be
applied in the following way. First the lender will use the funds to meet the costs
incurred in selling the property and to repay the outstanding mortgage including
interest. If there are subsequent loans secured against the property any surplus
will also be applied to repay these loans prior to any amounts being paid to the
borrower. If there are insufficient proceeds of sale to repay the mortgage, the
borrower will remain liable to repay any outstanding debt.
Indemnity Insurance
20. Mortgage indemnity is insurance which a lender may take out for its protection
where a high percentage loan is made. This insurance policy covers the situation
where, at some future stage, the lender has to repossess the property and sell it
and the lender suffers a loss. For example, if the property is sold for less than
the amount of the borrower's outstanding mortgage (including accrued interest) the
lender can claim on the mortgage indemnity to recover some of its loss. The basic
security for the mortgage is the property. The mortgage indemnity, therefore, acts
as a form of additional security for the lender. It provides no protection to the
borrower who gains no benefit, other than a high percentage loan advance than would
otherwise have been granted.
21. In most cases, the mortgage indemnity will cover the lender only for part of
its loss and, in addition, once an insurer has paid a mortgage indemnity claim,
it gains the right of subrogation; this means that the insurer can reclaim from
the borrower any money it has paid to the lender under the mortgage indemnity claim.
Either the lender or its insurer may take legal action against the borrower to recover
the shortfall if the borrower does not repay it voluntarily, although any action
is taken in the name of the lender. In most cases, the lender contacts the borrower
to recover the shortfall on behalf of itself and its insurer. This does not mean
that the lender recovers the loss twice; any money paid by the insurer which is
collected from the borrower is then passed back to the insurer.
Recovery Procedures
22. Following the sale of a property, the borrower remains liable to repay any shortfall
which might arise between the amount of the outstanding mortgage and the sale price
obtained. When a borrower purchases a property with mortgage finance, the borrower
enters into a personal covenant with the lender to repay the mortgage in full. When
two or more borrowers purchase a property, the lender will treat them as jointly
and severally liable for the entire amount borrowed, irrespective of how much each
borrower actually contributed to the mortgage repayments on a monthly basis. The
lender has 12 years (5 years in Scotland) in which to seek recovery of the shortfall
via the courts. Direct recovery could extend beyond that point.
23. After the sale of a property, the borrower should keep their lender advised
of forwarding addresses so that contact can made regarding the sale and repayment
of any shortfall. The lender will notify the borrower either by letter or by telephone
as soon as practicably possible of the amount of the shortfall. If the borrower
has not provided a forwarding address, the lender will try to locate and make contact
with the former borrower.
24. The lender and the borrower will generally agree a repayment arrangement taking
into account the borrower's current income and expenditure. In the majority of cases,
payment arrangements are made without the need for court proceedings; this enables
both parties to review the arrangement as and when necessary should circumstances
change. If the borrower is unwilling to enter into an acceptable voluntary arrangement,
the lender may use other enforcement remedies via the courts to seek repayment.
A record of the repayment arrangement might be held by a credit reference agency
and the borrower will need to advise any future lender of the shortfall debt and
repayment arrangement.
Further information can be sourced direct from the Council of Mortgage Lenders.
Call: CML on 020 7440 2255 , or visit their website at www.cml.org.uk
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