Mortgages/Further Advances & the Consumer Credit Act

[calamity jane]

I'm most probably wrong but, according to my understanding, Mortgages or Further Advances that are secured on land are exempt under the Consumer Credit Act.(section 16)

However if part of the mortgage or Further Advance is to refinance a secured loan or existing debt that was covered by the CCA, isn't this a modifying agreement which means that section 82 can be used?

[calamity jane]

Re: Mortgages/Further Advances & the Consumer Credit Act

Just putting this here for future reference(have a habit of not being able to find things when I need to).




Consumer Credit Act 2006 – concerns for mortgage lenders

This spring marks the introduction of the first substantive reforms under the Consumer Credit Act 2006 and radically overhauls and updates many provisions of the Consumer Credit Act 1974. Phil Catchpole reviews the impact of these reforms for lenders

The first set of reforms introduced in April includes a new test of unfair relationships to replace the existing extortionate credit bargain test, an extension of the jurisdiction of the Financial Ombudsman Service to consumer credit disputes and the abolition of provisions for the automatic unenforceability of improperly executed agreements.
A further set of changes will be introduced in April 2008 including the abolition of the financial limit under the Consumer Credit Act (CCA), the introduction of new post-completion transparency provisions (improving the level and quality of information given to debtors once an agreement is made), an overhaul of the existing credit licensing regime and enhanced powers of the Office of Fair Trading to take action against miscreant licence holders.
As a body of reforms, the 2006 Act significantly improves and updates existing UK consumer credit law. However, three key concerns arise from the reforms that may create uncertainty for residential mortgage lenders and the effect of these aspects of the Act need to be closely analysed by lenders in order to determine potential wider impact and consequences for forms of lending that should have remained untouched by the reforms.
Abolition of the CCA financial limit - dual regulation?
Perhaps the greatest uncertainty and the principal area of concern for mortgage lenders will be created by the abolition of the upper limit of £25,000 for CCA-regulated loans, due for implementation in April 2008. This will affect mortgage lenders when borrowers make variation to existing mortgage loans, and the unintended consequence may be that some unregulated loans become subject to the CCA and some Financial Services Authority (FSA)-regulated loans become subject to dual regulation under both the Financial Services and Markets (FSMA) and CCA.
The problem is created by the operation of variation made to original agreements under section 82 (2) of the CCA:
“Where an agreement (a “modifying agreement”) varies or supplements an earlier agreement, the modifying agreement shall for the purposes of the Act be treated as
(a) revoking the earlier agreement, and (b) containing provisions reproducing the combined effect of two agreements and obligations outstanding in relation to the earlier agreement shall accordingly be treated as outstanding instead in relation to the modifying agreement.”
Section 82 effectively operates to create a new CCA-regulated agreement comprising the earlier agreement and the modifying agreement.
For mortgage loans completed before 31 October 2004 (which are not FSA-regulated) variation of the loan by, for instance, a further advance, will most likely result in the combined loan becoming regulated under the CCA, forcing lenders to comply with CCA documentation requirements and to meet the new rules under the CCA 2006 for post-contract information such as prescribed annual statements, arrears and default notices.
For FSMA-regulated mortgage contracts (RMCs) created from 31 October 2004 that are varied by a further advance, the Department of Trade and Industry (DTI) has already acted to prevent such loans becoming subject to dual regulation through introduction of the Financial Services and Markets Act (consequential amendments) Order 2005.
This Order directly amended section 82 of the CCA, so that the revocation of the earlier agreement by the modifying agreement would not occur where the modifying agreement is an RMC. Modifying agreements that are RMCs are exempt agreements under section 16(6C) of the CCA. Though partially addressing the issue of dual regulation, the Order did not address the fact that modification may still occur in circumstances where lenders do not treat further advances as RMCs or the modification occurs as a result of an alternative type of variation to the original loan contract, such as through a transfer of equity or by an interest rate switch. To date, the possible risk of creating dual regulation by such variations remains, and the uncertainty caused (and a lack of clear guidance on the issue by the DTI) is generating increasing concern.
Retrospective application of the unfair relationships test
One of the most significant changes introduced under the 2006 Act (and directly applicable to new consumer credit agreements made from 6 April this year) is the introduction of a new test of unfair relationships, designed to allow consumers to challenge the terms of unfair credit agreements. Under the new test a court may consider all the relevant circumstances of a credit relationship to determine its fairness including:

• Any of the terms of the credit agreement and any related agreement;
• The way in which the creditor has exercised or enforced any of its rights;

Any other thing done by or on behalf of the creditor either before or after the making of the agreement or any related agreement.The intentional broad scope of this test gives sweeping powers to the court to examine every aspect of a credit relationship, not just the written terms of any credit agreement. However, of particular concern to mortgage lenders is that the DTI has ensured that the provisions of the new test will have a retrospective effect and will apply to any existing agreements from April 2008. From this date, it will be open to the court to find that a relationship is unfair by reason of conduct or events that have occurred at any time before the provisions came into force and to order the repayment of any payments made.
The unfair relationship provisions apply to any credit agreement between a creditor and an individual whether or not it is a CCA-regulated agreement, apart from an agreement secured by a first mortgage over residential land that falls within the category of exempt agreement provided under section 16 (6C) CCA (an agreement that is secured by a land mortgage and entering into that agreement as lender is a regulated activity for the purposes of FSMA 2000). The effect of this is that the unfair relationships test may include within its scope the provisions and terms of any unregulated first mortgage agreements made before 31 October 2004.
RMBS
The implications for lenders that securitise receivables under residential mortgage-backed securitisations (RMBS) are potentially significant - the new test will apply to any eligible agreements entered into before lenders became aware of the extent of the new requirements. Many such agreements will have been securitised under transaction documentation that did not contemplate the test of unfair relationships. The retrospective effect of the legislation could have profound effects upon different participants in the burgeoning UK RMBS market. The potential impacts have already been well signposted by the Bank of England's Financial Markets Law Committee in its earlier report in October 2005 on the new provisions.
For originators in typical securitisations, there is a risk that following adverse case decisions on the application of the unfair relationships test, the agreements supporting the receivables to be sold are not legally binding or enforceable as they fail to comply with relevant legislation (including the CCA). Such loans may need to be removed from pools of assets or substituted by originators. There may be costs to originators compensating debtors under agreements and by becoming obliged to unwind transactions. If significant unfairness is established across whole portfolios, this could prejudice the credit standing of the originator and erode investor confidence in such securitisations.
For the special-purpose vehicles (SPVs) or trustees established to hold pools of relevant receivables, if significant unfairness is established there may be a need to assess the comparative risks of wholesale repurchase before actual problems arise against the increased possibility of receivables becoming uncollectible in the future. There is a technical risk of SPVs being joined as defendants in proceedings along with the originator (which bears the burden of proof in any proceedings). There is a potential risk that SPVs may become subject to damages claims from consumers even after closure of securitisations (though any loss may be mitigated by indemnities offered by the originator). There will be a need to review existing contractual mechanisms that allocate risk to the originator, a need to review and adjust commercial terms, to review the buy back and substitution provisions within documentation and generally ensure that warranties, representations and indemnities given operate effectively.
It is no surprise that the principle of retrospective application of the new test has been questioned and challenged by the industry, especially in relation to mortgages by the Council of Mortgage Lenders. The DTI has indicated its willingness to discuss with the industry the length of the transitional period for application of the test to existing loans. The CML has proposed that an additional six-year transitional period be included beyond April 2008 for mortgages affected so that the unfair relationships provisions would not bite until most securitisations had unwound. This is unlikely to be accepted by the DTI, which is probably not going to distinguish over retrospectivity between mortgage assets under RMBS deals and those under asset-backed securitisations comprising unsecured credit agreements.
Buy-to-let lending - CCA regulation?
A further concern raised by lenders is whether buy-to-let lending will fall under the provisions of the CCA. The concern is raised primarily by the wording of a new section 16B of the CCA 1974 inserted by section 4 CCA 2006 introduced in April:
“(1) this Act does not regulate -
(a) a consumer credit agreement by which the creditor provides the debtor with credit exceeding £25,000 … if the agreement is entered into by the debtor … wholly or predominantly for the purposes of a business carried on or intended to be carried on by him”
Section 16B (2) allows for a declaration to be made by the debtor creating a presumption that the agreement is entered into wholly or predominantly for such business purposes. The DTI has reassured the industry that it does not intend to regulate buy-to-let, and the business exemption it has introduced under the 2006 Act should provide clarification. However, concerns remain. First-time buy-to-let borrowers and buy-lo-let loans covering a small number of rental properties which were otherwise not protected by the Act may, following the abolition of the £25,000 financial limit, come within the scope of the Act, triggering a requirement for regulatory compliance by lenders. The DTI freely admits that this is an unintended consequence of the 2006 Act.
For some lending, the existing Consumer Credit (Exempt Agreements) Order 1989 will exempt smaller agreements entered into for buy-to-let purposes. But the DTI has warned lenders who use agreements that do not fall within the scope of this existing Order that they will need to ensure regulatory compliance. The DTI has suggested in its response to a recent consultation on draft statutory instruments under the 2006 Act that it would address this unintended impact on buy-to-let lending and seek to amend the CCA 1974 specifically through use of a Legislative and Regulatory Reform Order. The amendment would exempt any agreements that are entered into in order to provide credit of more than £25,000 to finance or refinance the purchase of land that is to be let for use as a dwelling, or to finance the repair or improvement of such land or the provision of any dwelling upon it, where the loan is secured on that land.
It remains to be seen when the DTI will successfully address this concern and prevent the regulation of buy-to-let lending by the back door.

[andrew1]

Re: Mortgages/Further Advances & the Consumer Credit Act

Did you go anywhere with this Calamity J ?