Firstplus Rule 78 calculations

[Surfer]

We took out our loan for £53300 in Nov 2004. In Feb 2006 we decided that we had had enough and sold our property. Firstplus used rule 78 to calculate the settlement figure and as a result we had a deficit of £5700 although by that time we had paid approximately £6190 on the loan.
I now understand that according to OFT this calculation may have been unfair and that they should have used an actuarial method. Using Rule 78 on an unregulated loan is contrary to section 140 of the CCA "unfair credit relationship".
Do you think I should challenge Firstplus on this isse and get them to re-calculate the settlement figure. We have paid over £3600 at £70 per month since Feb 2006 and still owe about £5400! We just to get rid of Firstplus and any advice will be welcome.

[natweststaffmember]

Re: Firstplus Rule 78 calculations

I would ask them the question based on the information you have and when you have a response post it up here.

[Surfer]

Re: Firstplus Rule 78 calculations

I should have mentioned that I have already asked Firstplus and have been told that Rule 78 was the standard calculation in 2006 and there was no issue.

[natweststaffmember]

Re: Firstplus Rule 78 calculations

Was that their final response?

[ed.]

Re: Firstplus Rule 78 calculations

The article is no longer live, but I have a full copy. I also had a few emails with Beevers on this issue.

Mortgage Redemptions – Problems With the Rule of 78 and Default Charges - Prepared by Paul Beevers 03/12/2007

Many borrowers and their Solicitors have not heard of the Rule of 78, although it could cost them dearly when it comes to repaying their loans, as the example of Mr Evans (mentioned below) shows. The Rule of 78 is a formula used by some lenders to calculate a redemption figure for a loan that is being settled early by a lump sum payment. It was put forward by the Crowther Committee in its 1971 Report as a way of calculating an accurate early settlement figure[1] and when the Consumer Credit Act 1974 introduced a statutory right to a rebate of interest charges on early settlement[2] the Consumer Credit (Rebate on Early Settlement) Regulations 1983 required lenders to give borrowers a rebate at least as generous as the one provided by the Rule of 78. At the time this seemed like a major step forward for borrowers, although that turned out not to be the case.


By 1994 it was clear that early settlement rebates, and the Rule of 78 in particular, was not working as the Crowther Committee intended[3]. The rebate expected by borrowers was in some cases turning out to be the exact opposite, and lenders were receiving significant windfalls[4], particularly when borrowers wanted to redeem long term loans at higher rates of interest (see Mr Evans example below). As a result consumer organisations were lobbying for change, which was supported by the OFT. Some lenders began including terms in their non-regulated loan agreements entitling them to use the Rule of 78 to calculate settlement figures, once they realised how beneficial the formula was for them. The Guidelines for Non-status Lending published by the OFT in 1997 described the use of the Rule of 78 for the calculation of early settlement figures as unfair and oppressive[5], and City Mortgage Corporation was required by the OFT to give an undertaking not to use the Rule of 78 to calculate settlement figures for non-regulated loans[6]. After a long consultation the Consumer Credit (Early Settlement) Regulations 2004, which do away with the Rule of 78 in consumer credit lending, were issued and brought into effect on 31st May 2005 for agreements entered into after that date[7]. Once the Consumer Credit Act 2006 is brought fully into force all loans to individuals will eventually be regulated and the Rule of 78 will have no place in the calculation of settlement figures, but until then it is still a matter of borrower beware, particularly if your agreement is unregulated. It will have taken over 15 years[8] for the government to recognise the problem with the Rule of 78 and abolish its use.


Until its use was abolished the Rule of 78 applied automatically to loans regulated by the Consumer Credit Act 1974, but not to unregulated loans. To get the benefit of a Rule of 78 calculation on the early settlement of unregulated loans lenders have to include a specific provision in their loan agreement contracting into the use of the formula, and this proved to be their achilles heel. The OFT was able to use its powers under the Unfair Terms in Consumer Contracts Regulations 1994 to obtain an undertaking from City Mortgage Corporation, but appears to have embarked on general reform rather than tackling lenders piecemeal, which left it to individual borrowers to challenge their lenders. Not an easy task as the financial balance of power will almost always favour the lender. Recently in Evans v Cherry Tree Finance the High Court[9] decided that a contact term which permitted a lender to use the Rule of 78 to calculate a settlement figure fell foul of the Unfair Terms in Consumer Contracts Regulations 1999, and was therefore void. Mr Evans borrowed £105,000 from Cherry Tree Finance and when he wanted to redeem his mortgage 18 months later a Rule of 78 calculation gave them a windfall of some £34,000 over and above the capital balance actually outstanding. Mr Evans paid under protest and issued proceedings, which eventually resulted in a judgment in his favour. Cherry Tree Finance was ordered to repay his £34,000 with interest. The Court of Appeal is due to review the decision in February 2008, but only on the issue of whether Mr Evans was a consumer.
What does this mean for borrowers? Mr Evans judgment has set a precedent which other borrowers can use to either challenge settlement or redemption figures calculated using the Rule of 78, or to recover overpayments from their lenders. Claims for repayment can be made going back up to 6 years[10]. Check your redemption statements is you suspect you paid too much when you repaid your mortgage, your Solicitor should have kept a copy if you can’t find one.


Lenders who contract into the Rule of 78 may also use their contract terms to set default charges that their borrowers might feel are excessive. Default charges can also be challenged under the Unfair Terms in Consumer Contracts Regulations 1999, and if found to be excessive nothing will be payable. These challenges will not be affected by the test case brought by the OFT against the clearing banks, and should not be adjourned.


This is all well and good in theory, but what do borrowers or their conveyancers do when confronted with a redemption figure they believe is too high and a sale of the mortgaged property is due to be completed? Paying under protest and suing to recover the overpayment is one approach, but there are others, including using s.91 of the Law of Property Act 1925. Getting a redemption figure early and checking it is essential so that any issues can be raised before contracts are exchanged.

Paul Beevers
Chadwick Lawrence Solicitors

[Surfer]

Re: Firstplus Rule 78 calculations

Interesting article and certainly food for thought. I have fired off a post to OFT via Trading Standards regarding the Rule 78 used in calulating my settle figure. Using the actuarial method there is a difference of about £1600 but having already paid approximately £3600 over the past 3 years and 6 months, the balance should be in the vicinity of about £650 and not close to £5500. Asked for a settlement figure yesterday and they were unable to give it to me and said I woudl need to wait several days. Every other financial institution has been able to give it to me over the phone immediately.

[Surfer]

Re: Firstplus Rule 78 calculations

Seems S5 of the UTCCR is the best way to tackle it.

[ncf355]

Re: Firstplus Rule 78 calculations

Thanks for this, pure dynamite that ruling!

Just as an aside, it would appear the appeal was rejected anyway -

[Surfer]

Re: Firstplus Rule 78 calculations

Thanks for this, pure dynamite that ruling!

Just as an aside, it would appear the appeal was rejected anyway -

The link flashes up as an untrusted site and that it may not be the site it is supposed to be.

[Amethyst]

Re: Firstplus Rule 78 calculations

Evans v cherry Tree Finance

A borrower who takes out a loan secured on a property that is partly residential and partly commercial is a consumer for the purposes of the Unfair Terms in Consumer Contracts Regulations 1999.
This was the finding of the Court of Appeal in Evans v Cherry Tree Finance Ltd & Anor where the application form was entitled "Secured credit agreement for a commercial loan". The borrower's property was partly residential and partly commercial and each part had a separate address. The borrower's address on the form was given as his residential address and the property to be secured was given as the commercial address. The phone number given for each address was the same. The purpose of the loan was said to be the repayment of an existing mortgage and to satisfy a divorce settlement. The borrower subsequently defaulted on the loan and his property was sold. The lender realised the sum due under the loan which included an early redemption charge calculated under the rule of 78. The borrower claimed he was not bound by the terms imposing the charge because they were unfair.
The judge at first instance held that the loan was not a business one but one taken out to settle the divorce settlement and enable the borrower to have a roof over his head as well as a place to work. As a result, the borrower was a consumer under the Regulations which therefore applied to the loan contract and the condition imposing the charge was unfair.
The Court of Appeal agreed. Looked at objectively, the loan was to enable the borrower to continue his livelihood but that was not its only purpose. The lender could have deduced from the information supplied that the borrower had been both living and working at the property and that he had taken out the loan for non-business purposes.






(have removed the faulty link from ncf's post)

[ncf355]

Re: Firstplus Rule 78 calculations

Hi

the link was actually perfectly safe, I think it was a screw up with Evershed's srver set up (I'm an I.T bod!)

Amethyst, do you have a copy of the ruling in the high court that you could email to me please?

I can only find the later appeal!

[Amethyst]

Re: Firstplus Rule 78 calculations

http://www.bailii.org/ew/cases/EWCA/Civ/2008/331.html

is the appeal

was appealed up from Leeds queens bench, could email them for it I guess - enquiries@leeds.countycourt.gsi.gov.uk
can't see it online anywhere

[ncf355]

Re: Firstplus Rule 78 calculations

Hi,

yep, sorry I've got the appeal text, after the original High Court judgment that gave the rulling on the repayment itself being unfair?

As reffered to in the Appeal - "HHJ Kaye QC, sitting as a deputy high court judge in Leeds"

Thanks

[Surfer]

Re: Firstplus Rule 78 calculations

Been awhile since I have been on here and buried my head a bit, but we still have the Firstplus issue. We have paid FP approximately £70 per month for the past 51/2 years totalling approximately £4500. We still have an outstanding amount of about £4300 to pay out of the £5700 deficit when we pay a bulk sum.
If FP had not used Rule 78 to calculate the settlement figure in Feb 2006 the deficit would have been a lot lower and probably cleared by now.
Our problem now is that I am on Pension Credit as neither the wife or myself can no longer work. Paying the £70 per month is now getting quite stressful. Last year we tried to pay extra each month which they accepted and then a few months later sent us the extra that we had paid in over the months as a lump sum refund. Obviously no interest added. FP obviously also want the loan to run the full term to maximise how much they can get off us. The full term runs until I am 70. Surely lending money to someone that will be paying off after they have retired is irresponsible?
I really need to do something about this but not too sure how to approach it. I was thinking of asking for a settlement amount by registered email and when this is not forthcoming to send a SAR asking for all details in any form of all dealings with them. We have not had a statement off FP for about two years. I thought they were obliged to supply a statement at least once a year or doesn't that apply in this case?
Once I have the SAR perhaps the way forward would be to look at "Unfair terms in consumer contracts regulations 1999" regarding Rule 78 that was imposed in 2006. Failing this offer them £1 per week, but then do not want to be paying them until I die.
We borrowed the money and fair enough we have to pay it back but their terms are onerous especially the way they used Rule 78 to calculate the settlement figure. All we want is for it to be worked out fairly and we will pay what we owe, but it seems the only way to do this may be through the courts! This is our only outstanding debt!
Any suggestions please?

[Surfer]

Re: Firstplus Rule 78 calculations

Still battling on this front due to lack of updates. Now paid about £4800 on the £5007 shortfall, but we still owe £4300. under normal circumstances we both retire in 2014, but the loan continues for another 5 years until 2019. By this time we would have paid over £11000 to settle a £5000 shortfall. We feel that we have more than enough in capital and interest payments!
Surely this is irresponsible lending and can be challenged?