Arrears? New rules may help

Are you in arrears on your mortgage and facing the threat of repossession? New protocol from the Civil Justice Council could help you.

Changes mean that mortgage lenders may now only use "possession" proceedings as a last resort. This is in response to the recession drawing more businesses into bankruptcy and forcing them to lay off workers, thereby increasing the risk of income and home loss.

By specifically promoting greater communication between the lender and borrower when in arrears, the new protocol can affect the outcome of court proceedings if not followed correctly.

The lender is required to inform the borrower of the total amount of arrears, the total amount outstanding under the mortgage and whether any interest will be charged. A period of discussion must then take place in which the borrower must inform the lender of the reason for their poor financial circumstances and makes proposals for repayment.

Potential changes should be considered, in terms of length of term and date of regular repayment. Although they have the right to reject it (without explanation) the lender must consider all reasonable requests to alter the terms of the mortgage. Lenders should also now refer borrowers to appropriate debt advice agencies.

The protocol further states that the lender must not start possession proceedings if the borrower can show that they have submitted a claim to an insurer under a mortgage protection policy. The same applies if they have taken reasonable steps to market the property at an appropriate price in accordance with professional advice.

Importantly the protocol applies to both borrowers and lenders. By looking at the whole course of dealings the Court will decide if penalties should be awarded for failure to meet the regulations. Although the lender will not usually pay the costs of possession proceedings (due to a standard clause in most mortgages) the Court now has the option to go against the contractual provision if appropriate, or award higher or lower interest to be paid on the arrears.

Although lenders can theoretically get around the new requirements by exercising their contractual right to enforce their security (by selling the property as an alternative to seeking possession) the Council of Mortgage Lenders state that this should only be done in exceptional circumstances.

This new protocol may well change how lenders behave but it should be used with caution. There is an equal onus on borrowers to communicate and the penalties for not following the regulations could be more harmful to the borrower than to the bank.

If you would like more information on this or any other legal matters please contact Martin Keegan on martin.keegan@wards.uk.com or James Taylor on james.taylor@wards.uk.com

Martin Keegan & James Taylor