Thread: Very interesting article on ERC's

That is interesting although it took a few read throughs to understand it properly (and not sure that I still do after just 4.5hrs sleep)

I particularly like these:

The Unfair Terms in Consumer Contracts Regulations 1999 (Regulations) will apply if the term is not individually negotiated (which it rarely will be).

For mortgages that are regulated by the Consumer Credit Act (CCA), it is doubtful whether ERCs can be charged at all because of the combining effect of sections 94 and 173(1) CCA.

Unfortunately the CCA 1974 only applies to loans under 25,000 which would certainly preclude most mortgages.


I would take issue with several of the points made in the article asserting that ERCs are lawful. (I lecture in contract law so do have some idea of what I am talking about-not claiming to be right on all issues this is simply my interpretation of the law in relation to the article. Any comments or disagreements appreciated)

Firstly you need to consider the context in which this is written. It is written by solicitors and the target audience is mortgage providers thus it is highlighting arguments that they can use against any claims, at the same time, if any interested consumers are reading it is aimed at putting them off claiming.

Secondly the article states that ERC are not related to breach of contract. This is simply not true. When you take out your mortagage you will generally do so for a specified number of years eg 15, 20 or 25. This is a term of your contract. By ending early you are in breach of that term.

A fixed rate protects the borrower against rising interest rates. In order to lend at these rates, the lender usually borrows on the market at a fixed rate. If the loan is repaid early and interest rates have fallen, the lender will have to pay to break its own market deal. That cost is passed on to the customer as an ERC.

Again this can be challenged. According to Dunlop v New Garage there is a distinction between a penalty clause and liquidated damages clause. (Penalty being unlawful, liquidated lawful). To amount to a lawful liquidated damages clause it must be shown that the fee levied amounts to a genuine pre-estimate of losses. As interest rates can not be predicted with any certainty, how can they argue that any fee was a pre-estimate?

Also we all know that they offer these fixed and discount deals in order to remain competitive. With fixed rates the consumer also takes a risk in that interest rates could fall. Can they then recoup their losses? I don't think so!

Typically, an ERC is a percentage of the original loan or the amount repaid to date, an amount of interest or a sum calculated at a later date, with reference to movement in market interest rates.

Mine was a set fee for redeeming year one, reduced year two, then again year three and therefore in no way relates to any actual losses.

From what I've read regarding some of the Sub prime lenders. They charge excessive interest during the mortgage and therefore can hardly claim to be suffering a loss. They then charge hugely excessive fees: 9,000 is not untypical. I'm no mathematician but this does not seem to me to add up. Under the Dunlop case a fee is a penalty if the sum stipulated is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to follow from the breach. Which to me seems to hold true with such fees. In my case the fee of 900 pounds for ending two days before the ERC period would end again seems excessive.

nor is it (ERC) intended to deter the customer from early repayment.

Any one fooled?

The ERC is to compensate the lender for genuine commercial risk or loss, not to penalise the customer.

So who compensates the customer if a fixed rate turns out to be unfavourable to them?
It is unacceptable to place their commercial risk on to consumers. Huge institutions are more than capable of absorbing this commercial risk. It is common for businesses to take commercial risks in trying to attract customers. You do not go in to Tescos and see buy one get one free offers subject to terms that you might be required to pay a fee later if you never buy their products in the future in order for you to cover their commercial risks. Also this is where Unfair Contract Terms Act s.4 comes in - a business can not impose a term that requires a consumer to indemnify their loss. This is subject to the requirements of reasonableness in s.11 but to be honest I can't see a court in the land concluding that the loss should fall on the consumer as oppose to the bank in these circumstances.

As we all now the fees also amounts to an unfair term under the Unfair Terms in Consumer Contracts Regulations 1999

Checklist

• Are your loan agreements and supporting literature clear and intelligible?
• Did you avoid using the term “early redemption penalty”.
• Do you calculate the ERC
• precisely as the contract allows – and does the calculation stand up to scrutiny? Are you confident that it fairly represents your loss on breaking the loan?
• Do you mitigate your position by looking to re-lend and/or discounting the ERC to reflect receiving the money in one lump sum?

This is particularly interesting - this is the author's clever get out clause! Its basically saying I am advising you that these ERC's are lawful but if you do not follow this check list don't sue me if they are found to be otherwise. The classic here being 'did you calculate the ERC precisely?' which is pretty much impossible. A nice one for us is the last about mitigating their loss.

DisputesEven lenders with clear documentation are not immune from disputes. The Unfair Terms in Consumer Contracts Regulations 1999 (Regulations) will apply if the term is not individually negotiated (which it rarely will be). The court or Financial Ombudsman Service (fos) will consider whether, with regard to the circumstances prevailing at the date of the contract, the term is one, which contrary to the requirement of good faith, caused a significant imbalance in the parties’ contractual rights and obligations to the customer’s detriment. Paragraph 1(e) of Schedule 2 to the Regulations provides that a term “requiring any consumer who fails to fulfil his/her obligation to pay a disproportionately high sum by way of compensation” may be unfair.

This is virtually admitting they are unlawful... although not quite just that they are being disputed.

FOS statistics, while not breaking down the number of mortgage complaints relating to ERCs, do show that the number is decreasing. This seems to be due to a greater understanding of the reason for ERCs and clarity of documentation.

Or maybe a greater understanding you get better results if you sue their a***s rather than relying on FOS!

The judgement in IFG Financial Services Ltd v Financial Ombudsman Service has confirmed that the FOS, in deciding what is fair and reasonable in a given case, must take into account – but does not have to apply – the law.

Interesting therefore if FOS finds in favour of a bank this does not mean that a court action will fail.

Judicial review is highly unlikely to provide an effective avenue of redress against an adverse decision.

Roughly translated means: banks do not attempt to appeal any findings of the FOS which favour the consumer as you have no hope in front of a judge applying the law and this will set a precedent against you.

However, in ERC cases costs can easily exceed the sum in dispute and if the value of the ERC is below the small claims limit (£5,000), the general rule is that lenders will not recover their costs even if successful. When embarking on litigation, lenders will need to decide whether they are just fighting a particular case or fighting to avoid an adverse precedent on a widely distributed product.

Sound familiar? So final advice to the bank is: do exactly what you are doing in relation to other bank charges: pay out at the last minute in a last ditch panic to avoid going to court!

It is also important to realise that either route can bring publicity to an adverse decision. Disgruntled customers can and do go to the financial press. FOS decisions can be publicised through the FOS’ monthly news bulletin and court hearings are generally in public

.

So banks don't forget those confidentiality agreements! (which incidentally are not worth the paper they are written on)

Hope this helps put people's minds at rest. An excellent find Lickthewall! Nice to know we can expect pretty much the same reaction to the ERCs as other bank charges!

Others' thoughts and comments would be greatly appreciated.

Zoot

When I get time, I will have a good read through all this...need to do it when there are no kids around.

Lickthewall....what a find!!

Having read the article over and over it does seem to show that ERCs are unlawful, and yes this may be the link in the missing chain for claiming back the excessive charges that are placed. Hope you dont mind but i have added a link to this piece into me sig so as many ppl as poss can have a look at it.
Having been on the receiving end of excessive charges (see ssvswift in mortgage companies forum) i will be definately watching for updates and any news on this matter....thanks again!!

Could you put this into a form of words(legalese!!:grin: )

The charge you have levied in the form of an early redemption fee (substitute any other name which your mortgage provider has used) represents a charge in relation to a breach of contract on my/our part in that I/we terminated the mortgage contract before the contractually agreed period of XX years.

you could stop here if you are simply wanting to make a point, however, if they are contesting that there is no breach continue:

This term of the contract was clearly stated in the written mortgage offer signed by myself (and XXX?). The terms of which were incorporated by reference into the mortgage deed which was not only signed by us but also witnessed. There is clearly no room for doubt that such a clause existed in the contract. Similarly, there is no question that we in fact redeemed the mortgage on the xx/xx/xxxx as evidenced by our final redemption statement. This date is clearly well before the contractually agreed date of xx/xx/xxxx and thus represents a clear breach of the contract.

Furthermore the fact that you may have contemplated us ending the contract early in no way prevents my/our actions from amounting to a breach. To draw an analogy from criminal law, the fact that a policeman contemplates that a particular known offender may offend again in the future does not make the offender's actions lawful when he does in fact offend.

Thus the only plausible analysis that can be applied is that you have contemplated my breach of contract and provided for this eventuality with your ERC. English contract law requires such a fee to be a genuine pre-estimate of your losses if it is to be lawful following the case of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79

(You could stop here, or, if you want to really drive home the issue and go into full patronising mode!)

The actual issues involved here really are quite simplistic. I find it astonishing that I, as a lay person, am having to explain such basic concepts to an experienced legal expert as yourself.

You could continue:

If you require any further assistance in grasping the fact that you have my money, there is a particular gorilla in outamongolia I could recommend to help explain it to you.

...0r may be not!

Hope this helps Lickthewall

Lets see them wriggle out this one?!


Zoot

Originally Posted by lickthewallfatboy

thanks very much for that.I have drafted a letter to BM with all the salient points included.

I am very grateful for this.

All very interesting so far. Hate to say it, but if you send anything like this to Birmingham Midshires they'll just cut and paste a paragraph or two from your letter into their template and send it back. I spent about an hour drafting a letter to them explaining how much it'd cost them if it went to court, the fact they'd have to explain in a court room how they calculated their penalty, and by virtue of the fact they haven't explained their calculations so far then it can only be assumed it's a penalty, and therefore irrecoverable etc. Then I offered to settle for about £200 less than the amount they owed me.

Template letter back. 'We understand that your complaint is as follows: You are unhappy with the charges incurred, and wish to settle for £XXXX".

Duh.

Just need to turn all this lot into something suitable for Moneyclaim and off we go.. I'm writing up the claim against BM as we speak, and plan to put it in early next week - so will be reading this thread with interest in the coming days.

Hi Thunderpuss.

This is what I used for my money claim which just about fitted when you add the standard bit about claiming the statutory interest.

I am claiming the return of money taken by the defendant in the way of a redemption penalty charge in Feb 06. This charge relates to my breach of contract in that I terminated the contract before the agreed period. The defendant's charge for our breach is a disproportionate penalty and therefore unenforceable as it is contrary to common law as established in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79. Further, as a disproportionate penalty it is invalid under the Unfair (Contracts) Terms Act 1977 s.4 and under the Unfair Terms in Consumer Contracts Regulations 1999. Para.8 and sch.2(1)(e). I have repeatedly asked the defendant to justify their charges but they have declined to do so.

Hope this helps

Zoot

Cheers Zoot, you're a star

I used this paragraph in my letter to i group for the return of my ERC


OFT stated:

3. A term in a mortgage agreement which requires the borrower to pay more for breaching the contract terms than actual costs and losses caused to the lender by the breach (or a genuine pre-estimate of that) is likely to be regarded as an unfair penalty and to be unenforceable both at common law and (in a consumer mortgage) under the Unfair Terms in Consumer Contracts Regulations. A redemption charge may be regarded as a penalty even if it is expressed as the price for exercising a right rather than a consequence of breaking the agreement.

Best regards

Yes if you do a SAR like you would normally do to a bank they will provide all the information you need.

Best of luck

Zoot

Just a quick post to retain the link.

Cheers

MF5

PS Great thread well done LTWFB and ZOOT

Hi guys,
Just reading through this link as a matter of interest as I'm ready for fill out my moneyclaim against Preferred. And LOW AND BEHOLD - the statement I was looking for was kindly produced by Zootscoot.
Excellent stuff!!