Anyone holding a Bank of Scotland (or any of their brands) mortgage may wish to consider this case very closely, it is subject to appeal, but if you have ever been surcharged or had your mortgage repayments changed, possibly for falling into arrears (however small), show this post to your legal adviser.
The full 29 page judgment is one this link for the next week, then it has to be purchased. so download it now! Master Ellison's full judgment online
Bank of Scotland held to account
Chris McGrath LLB, Solicitor with Housing Rights Service, discusses a recent Housing Rights Service High Court Case where Bank of Scotland was found to be double billing customers in mortgage arrears.
The Northern Ireland High Court has very recently handed down judgement in test cases concerning the mortgage arrear practices of Bank of Scotland plc. The judgement is critical of Bank of Scotland plc and the lender is held to account over poor practice in dealing with borrowers’ mortgage arrears.
Curious rise in monthly instalmentsThe cases all involved claims for possession by Bank of Scotland plc of the family home following the accrual of mortgage arrears. Housing Rights Service provides representation to borrowers facing possession proceedings and in 2013 a pattern was identified of unexplained increases to the contractual monthly instalments of Bank of Scotland plc customers.
In some cases the contractual monthly instalments had increased by hundreds of pounds, despite there being no rise in the banks interest rates.
Following further investigation it appeared that the Bank of Scotland had been capitalising the borrowers’ mortgage arrears by adding the arrears to the outstanding mortgage balance, without the borrowers’ consent.
This resulted in an increased mortgage instalment, so that, in effect, the customers were paying off the arrears but were not aware of this, nor aware of how much was being paid to address the arrears. Significantly, the bank continued to proceed with legal action to seek possession of the properties and sought additional payments towards the arrears in order to prevent possession.
Following identification of this issue the Chancery Court regularly refused to grant Orders in such cases, and three test cases were agreed upon to address the issues raised.
Practice questioned by Chancery MasterMaster Ellison noted that all three cases raised a point of some importance.
- Whether the lender may consolidate (capitalise) arrears with the effect of increasing the contractual monthly instalment to spread those arrears over the remaining term of the mortgage, and also; rely on the arrears so consolidated as outstanding arrears for the purpose of possession proceedings.
Difficulties faced by affected borrowersThe defendants argued that the practice adopted by Bank of Scotland plc was unfair because it prevented them from making a payment proposal to the court to repay the arrears. Ultimately this prevented the court from exercising its discretion to defer possession.
The Administration of Justice Act 1970 section 36 and Administration of Justice 1973 section 8, provides the court with discretion to adjourn proceedings or make a suspended order for possession on terms that the defendants pay the arrears within a defined period of time that the court regards as reasonable. The practice of Bank of Scotland plc and lack of clarity in respect of the account figures appeared to compromise this discretion.
The practice further compromised the affordability of payments to arrears, as the bank was seeking a much higher payment than was necessary to address the arrears. As noted by Master Ellison;
“The position of the defendants is that they do not understand how these provisions could have allowed the plaintiff on the one hand to revise their monthly instalments to include contributions towards outstanding arrears and on the other hand to claim in proceedings for possession that those arrears remain overdue, given that the plaintiff itself has arranged for them to be repaid by way of monthly instalments over the remainder of the mortgage term.” (para 19)
Good capitalisation or bad capitalisation?The Plaintiff stated that their practice of adding the arrears to the monthly instalment was in fact a duty under their mortgage contract, and that as the arrears had not been extinguished on their accounting system then this did not equate to capitalisation.
However, within his judgement Master Ellison refers at length to previous case law and the regulatory framework derived from the Financial Conduct Authority and is unequivocal in his assessment that the lenders practice of restructuring mortgage accounts so that arrears are included within a revised monthly instalment is capitalisation.
Furthermore, the court states:
“Where, as in the present cases, the plaintiff consolidates unilaterally, without any attempt to secure the borrowers agreement and without any assessment of affordability, that is extremely “poor” capitalisation according to the definition and criteria of the Financial Conduct Authority.” (para 54)
Court criticises practice of “double billing”Following the finding of the court that the practice adopted by Bank of Scotland plc was indeed capitalisation, it was subsequently necessary to consider whether the lender was in a position to continue to rely on these arrears for the purpose of possession proceedings.
On dealing with this point, the court observed that the lender was acting inconsistently with the legislation; namely the Administration of Justice Act 1970 section 36 and Administration of Justice Act 1973 section 8. The court highlighted the fact that lenders cannot evade or contract out of the exercise of the court's discretion to defer possession under the legislation.
The court has stated that the capitalisation of the arrears in essence resulted in these arrears being extinguished, and as such it should not be permissible to rely on such arrears to ground possession proceedings.
The court was critical of the lender's actions in this regard:
“The plaintiffs reliance on extinguished arrears may fairly be described as double –billing. Unilateral consolidation with double billing creates very real problems for borrowers, their advisers and the court. To the extent at least of the double billing, it is unconscionable.” (para 57)
The court found that the practice of Bank of Scotland distorted the borrowers’ perception of affordability and made it impossible for the court to define or ascertain the period within which any payment proposal would clear the arrears.
Master Ellison noted his view;
“The plaintiff is, as it were, having its cake and eating it. There may not be fraud involved, but I would certainly not regard this as fair accounting. The plaintiffs stance is one of extremely select subjectivity. It has somehow turned a tool of forbearance into its opposite.”(para 51)
a) any future consolidation of arrears will be in compliance with “good capitalisation” as defined by the Financial Conduct Authority and
b) discloses all past consolidations and all past double billing events.
In summaryThe Court has found that Bank of Scotland were adopting a practice of double billing and non-consensual capitalisation which was in conflict with the requirements of the Financial Conduct Authority. This practice was unfair as it evidently prevented borrowers from making payment proposals to the court to repay their arrears.
Clarity and transparency are essential during possession proceedings, otherwise very real problems can be created for borrowers, their advisers and the court. However the court has stated that the handling of accounts by Bank of Scotland in these instances, created ‘a mist of incomprehension, confusion and self-contradiction.’
The law provides protection to borrowers in that it affords the court discretion to stop possession action when a borrower can put forward a payment arrangement. However, the actions of Bank of Scotland distorted this discretion. It is our view that this practice unfettered would undoubtedly have resulted in many borrowers unnecessarily losing their home.
The case may be subject to appeal.
Read Master Ellison's full judgment online
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