Mortgage lender fined over repossession policy
One of the UK’s biggest specialist mortgage lenders has been ordered to pay a record £10.5 million for treating struggling borrowers unfairly and being too ‘trigger-happy’ with repossessions.
GMAC-RFC, which was a top 10 lender before the credit crunch hit, has been fined £2.8 million by the Financial Services Authority (FSA) and ordered to pay over redress of £7.7 million plus interest to more than 46,000 mortgage customers.
An investigation found that the specialist lender, which mainly dealt with sub-prime, buy-to-let and self-cert mortgages, hit struggling borrowers with “excessive and unfair” charges. It was also found to have launched repossession proceedings before "fully considering the alternatives".
This is the first time a lender has been fined over the way it treats borrowers struggling with payments. Complaints about arrears handling increased 41% to 39,181 in the first six months of 2009, according to the FSA.
The fine follows the FSA publishing its mortgage market review, in which it proposed tougher affordability checks and the end of self-cert mortgages.
Margaret Cole, director of enforcement and financial crime at the FSA, says GMAC-RFC’s fine should act as a deterrent to other lenders.
In a written statement, the lender has apologised to affected customers.
It says: “While our arrears charges were in line with the market, in hindsight we fully accept that for certain fees our estimates of the costs were not proportionate to the additional administration actually required.”
What affected customers should do:
Over 46,000 GMAC-RFC mortgage customers could now be due redress from a compensation pot of up to £7.7 million plus interest. This applies to customers who were hit with specific arrears charges between 31 October 2004 and 30 November 2008.
Specifically, the FSA fine and redress order relates to:
* Excessive and unfair charges for customers
* Proposed repayment plans that did not always consider customers’ circumstances
* Repossession proceedings that were issued without all the alternatives being fully considered
GMAC-RFC’s staff were also found to have insufficient training in how to deal with arrears cases.
Customers who were hit with arrears charges for failing to pay their monthly mortgage payment by direct debit are set to receive an average refund of £117.
Borrowers who paid early repayment charges applied to arrears fees and charges could get an average refund of £14. And average refunds of £45 could be available in cases where the solicitor’s instruction fee their paid was more than the actual cost.
GMAC-RFC has already set up a redress system, and says it will write to all affected customers with more details.
Following this, existing customers of GMAC-RFC will receive an automatic re-crediting of the charges plus interest to their mortgage account.
Past customers, who have now redeemed their mortgages with GMAC-RFC, should also receive a letter. This will, however, be sent to their last known address.
Affected customers who have moved address can contact GMAC-RFC on 0800 030 4662.
You can also find out more about redress on GMAC-RFC's website.
All sub-prime financial products are aimed at borrowers with patchy credit histories and the term typically refers to mortgage candidates, though any form of credit offered to people who have had problems with debt repayment is classed as sub-prime. Depending on the lender’s own criteria, sub-prime can apply to borrowers who have missed a few credit card or loan repayments to people who have major debt problems and county court judgments (CCJ) against their name. To reflect the extra risk in lending to people who have struggled in the past, rates on sub-prime deals are typically higher than for “prime” borrowers.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.