Developments – Regulated and unregulated lending
Since the recession of 2008, lending to individuals has become increasingly regulated. Regulations which came into effect in 2016 concern loans made to individuals acting in the course of their business and which are secured by legal charges over property that consist mainly of a dwelling. Prior to 2016, such loans were less regulated.
Understanding the regulations
Lenders are now required to comply with a variety of complex regulations which control the terms of such loans, the process to execute the documentation and, most importantly, the terms that can be imposed on personal guarantors.
To be regulated, the loan needs to have been made to an individual or partnership and not a company and has to have been secured over a dwelling.
The FCA is empowered to regulate such lending and its webpage states “ … if the lender makes a loan for business purposes to an individual sole trader, or (in England and Wales) a partnership, and the loan is secured on the borrower’s house or houses, the contract will be a regulated mortgage contract”.
Where these conditions are met, certain regulations apply to the execution, terms and enforcement of the loan and the terms relating to enforcement against personal guarantors. All such loans are primarily governed by the Consumer Credit Act 1974 (as amended) and in particular as amended by the Financial Services and Markets The Mortgage Credit Directive Order 2015 (SI 2015/910).
What should you do if you are being pursued under a personal guarantee?
If you are being pursued under a personal guarantee in respect of liabilities alleged to arise under what is a regulated mortgage contract, the procedure for defending such claims is quite different from a normal personal guarantee and the defences available are also quite distinct.
In a regulated mortgage contract, both the borrower and personal guarantor have a right to plead that the original agreement is subject to the “Unfair Relationship” provisions set out in section 140A to 140D of the Consumer Credit Act 1974 (as amended by the Consumer Credit Act 2006).
This jurisdiction allows the court to make orders in connection with a credit agreement, effectively thereby altering the terms of the agreement between the various parties in the event that it determines that the relationship between the creditor and the debtor arising out of the agreement (either on its own or taken with a related agreement) is unfair to the debtor because of any one or more of the following:
- any term of the agreement or of any related agreement;
- the way in which the creditor has exercised or enforced any of its rights under the agreement;
- any other thing done (or not done) by, or on behalf of, the creditor either before or after the making of the agreement or any related agreement”.
By way of illustration, it has been held that undisclosed excessive commission paid at the time the loan was agreed (in this case, the excessive commission was contained in a related agreement – a PPI policy) can amount to an unfair relationship (Plevin v Paragon Personal Finance Ltd (2014) UKSC 61).
Such claims give rise to very different enforcement procedures since the burden of proof is in practice reversed: by claiming the right to invoke the court’s jurisdiction under the Unfair relationship test, the defendant is deemed to have served his defence and the burden of proof is then reversed so that the creditor has the legal burden of proving that the relationship is not unfair (see Consumer Credit Act, section 141(2)).
Unfair relationship applications under section 140B(2)(b) or (c) are made by the debtor or guarantor, usually within 14 days of service of proceedings by the creditor, and once such written notice of an application has been served on all parties and the court, the defendant applicant (either the debtor or the surety) will be treated as having filed a defence (see CCA 1974 (as Amended) sections 140A and 140B; CPR 3H-337 and 7 BPD.10).
Although the personal guarantor may not be able to claim directly that the unfair relationship extends to him as a guarantor, he may nevertheless claim that the credit agreement is unfair to the borrower and is therefore unenforceable as against the guarantor (in whole or part).
Finally, regulated mortgage contracts are subject to the exclusive jurisdiction of the County Court, and therefore any proceedings issued by a creditor against a personal guarantor in the High Court will have been issued in the wrong court.
It is more common now than ever before for a guarantor to receive the unwelcome news from the bank that the guarantee is being called. The conduct of the bank and the wording of the suite of bank lending and security documents will be key in determining the rights the bank actually has as a matter of law. A careful reading of the documents is the first step a guarantor should take on hearing that a guarantee is being called, but even that will not be conclusive and valid arguments could well be available to guarantors to defend their assets from the reach of the bank.
Some of these arguments about contracts of suretyship that can be raised by a guarantor are very complex and this is especially so where there is more than one guarantor of the same liability. The key factor is that those on whom such demands are made need to act very quickly to ensure that legitimate substantive defences are not overlooked.