1 CONSUMER CHATTEL MORTGAGES – TO BAN OR NOT TO BAN – OPPORTUNITY OR PROBLEM? HOWARD JOHNSON, PART-TIME SENIOR TEACHING FELLOW, DURHAM LAW SCHOOL Abstract: The article examines recent proposals by the Department of Business Innovation and Skills not to repeal the much criticized Bills of Sale legislation relating to the giving my individuals of security over personal chattels, largely motor vehicles, in return for a loan; nor to ban outright the use of chattel mortgages in consumer credit transactions but instead to rely on a combination of the powers given to the enforcement authorities under the Consumer Credit Act 1974, Consumer Credit Act 2006 and the EU Consumer Credit Directive 2008/48/EC supplemented by industry self-regulation, in the form of a code of practice agreed with the Consumer Credit Trade Association. The article contends that the Bills of Sale legislation should be repealed and the regulation of Bills of Sale outside the area of regulated consumer credit agreements be left to the common law and where credit agreements are regulated then the chattel mortgage be fully absorbed into the consumer credit regime. Far from being banned the use of the consumer chattel mortgage be put on a modern footing. Introduction The two dicta set out below, uttered 122 years apart, appeal for legislative action to repeal the Bills of Sale Act 1878 (‘BSA 1878’) and the Bills of Sale Act (1878) Amendment Act 1882 (‘BSA 1882’) which govern the entering into of most chattel mortgage transactions by individuals, but as result of a recent Government review the largely discredited regime seems destined to survive at least for the medium term. Repeated calls for reform have been ignored by governments of all political persuasion. “My Lords, to say that “the Bills of Sale Act (1878) Amendment Act (1882) ” is well-drawn, or that its meaning is reasonably clear, would be to affirm a proposition to which I think few lawyers would subscribe, and which seems to be contradicted by the mass of litigation which the Act has produced and is producing every day. For my own part, the more I have occasion to study the Act the more convinced I 2 am that it is beset with difficulties which can only be removed by legislation.”i “The twists and turns of the Bills of Sale Acts have already been the subject of much judicial and academic comment (including a recent Law Commission report of July 2005 (number 296) on Company Security Interests). The issues raised in these proceedings have been complicated by their outdated provisions. One cannot help but think that the introduction of a modern system of registration offering protection and clarity to creditors, consumers and chattelowners alike, is long overdue.”ii Real property mortgages are common, well known and reasonably understood in the UK but the chattel mortgage, outside corporate company lending, is a much more illusive creature – very rarely used and little understood by individual borrowers.iii Where bills of sale, the name of the instrument that creates chattel mortgages are used there are strong arguments that consumers and small businesses are being taken advantage of by sub-prime lenders, and that, at least in relation to the financing of consumer transactions, there use should be completely banned. In part the cause of this is the use of outdated Victorian legislation – the Bills of Sale Act 1878 (‘BSA 78’) and the Bills of Sale (1878) (Amendment) Act 1882 (‘BSA 82) – the latter Act paradoxically designed as consumer protection legislation but going too far and creating a complex and technical regime which is not fit for use by consumers or the credit industry. In December 2009 the Department of Business, Innovation and Skills published ‘A Better Deal For Consumers: Consultation on proposal to ban the use of bills of sale for consumer lending.’ (‘Consult’)iv That of course was under a Labour Government, the Response published in January 2011 by the Conservative/Liberal Democratic Coalition Government has rejected an outright ban or revamped legislation but preferred to down the road of a mixture of a code of practice administered by the Consumer Credit Trade Association (CCTA)v and more extensive use of regulatory powers conferred on the enforcement authorities by the Consumer Credit Act 2006 and the EU Consumer Credit Directive (‘Response’).vi It can of course be argued that given the lending secured by chattel mortgage is an insignificant part of the total consumer credit market no action needs to be taken – but registrations are 3 on the increase with 38,200 being registered in 2009 compared with 27,900 in 2006 - nevertheless but the overall value of consumer loans secured is estimated to be in the range of £38£40m with about 18% of this being advanced to small enterprises and sole traders an insignificant market share of consumer credit lending.vii The key point, it is suggested, is both that this relatively small sector of the market gives rise to a disproportionate number of problems and complaints but also it is stopping a perfectly acceptable form of security developing a modern fashion respecting both the interests of the creditor and the debtor. It also has to be noted that the legislation is full of traps and pitfalls for bills of sales used by sole traders. The contention advanced in this article is that the Bills of Sale legislation be repealed and that outside the area of regulated consumer credit agreements the chattel mortgage be controlled by contract law and personal property law but that in relation to chattel mortgages given in relation to regulated consumer credit transactions consumer credit legislation be amended to take account of them and provide a regime fit for modern use. It is the contention of this article that far from being banned their use should be recognized as a valid component of modern lending and more reputable firms encouraged into the market by a regime that is fit for use in the 21st century which might have the by-product of reducing the notoriously high rates of interest in this sector of the market.viii History The rationale for the regulation of Bills of Sale legislation is set out well by Lord Herschell in The Manchester, Sheffield & Lincolnshire Railway Company v The North Central Wagon Company: “It must be borne in mind that the object of the earlier Bills of Sale Acts was entirely different from that of 1882. The former enactments were designed for the protection of creditors, and to prevent their rights being affected by secret assurances of chattels which were permitted to remain in the ostensible possession of a person who had parted with his property in them. The bills of sale were therefore made void only as against creditors or their representatives. As between the parties to them they were perfectly valid. The purpose of the Act of 1882 was essentially distinct. It was to prevent 4 needy persons being entrapped into signing complicated documents which they might often be unable to comprehend, and so being subjected by their creditors to the enforcement of harsh and unreasonable provisions. A form was accordingly provided to which bills of sale were to conform, and the result of non-compliance with the statute was to render the bill of sale void even as between the parties to it. But, this being the object, the enactment is, as we have seen, limited to bills of sale given “by way of security for the payment of money by the grantor thereof.”ix The legislation pre-dated electronic asset registration systems, such as Hire Purchase Information Ltd and the more sophisticated anti-avoidance devices of modern insolvency legislation. Consumer lending is concerned with conditional bills of sale that cover any assignment or transfer of personal chattels to a person by way of security for the payment of money. Physical possession of the property (unlike a pledge to a pawnbroker) does not change hands. The property itself does not change hands but the lender, as the owner, has personal rights of seizure. A bill of sale can only be enforced if it has been properly registered in the prescribed form and it shows the correct Court seal. All bills must be registered by the lender within 7 clear days of their making at the High Court otherwise they may not be accepted except in extenuating circumstances (s8 BSA 1878).x This presents problems with providing any form of cooling off period. If the consumer, lender or the goods are outside London, a copy of the bill of sale must be sent to the local district judge (see Annex D of Response for illustration of the process). Anyone wishing to make a search of the register, either centrally or locally, must pay a fee. Searching currently requires attendance in person which, to say the least, is not very user-friendly or accessible system. However in practice most lenders register their bills of sale with online electronic asset registers in much the same way as finance companies register hire-purchase and conditional sale agreements – but this is not mandatory and the courts have declined to impose a duty of care to register to prevent lenders or third party purchasers being mislead.xi The BSA 1878 was essentially a statute protecting creditors from unauthorized sales by the mortgagor to a third party by introducing a registration systemxii, while the BSA 1882 was designed as a consumer protection measure to stop the abuse of borrowers – 5 however the regime produced was so complex that, at least in respect to consumer transactions, bills of sale fell out of favour – being replaced largely by the concept of hire purchase – a bailment accompanied by an option to purchase – hire purchase is a legal fiction but the concept proved highly successful and remains in common use today.xiii Indeed to avoid these provisions some chattel mortgage lending as been dressed up in hire-purchase garb giving rise to the argument that the transaction is a sham and the arrangements void for non-compliance with the Bills of Sale legislation.xiv The bills of sale legislation only regulates transactions with individuals – whether acting in a business or consumer capacity.xv The result of this non-user friendly regime is that chattel mortgages are not used by mainstream lenders but seem to have become the province of sub-prime lenders lending money at very high rates of interest to often vulnerable borrowers. The main area of activity is the ‘log book loan’ on the security of the consumer’s car, often with minimal or no credit checks – the lender relying on the security of the car. The interests are high with ample contractual opportunities to pad charges by high administrative charges such as £12 per time for sending reminder and late payment notices further aggravated by historically by compound interest default charges. Indeed the terms of the bargain are often very poor from an economic point of view with lenders willing to lend only half the value of the chattel (usually a motor vehicle). Agreements will usually stipulate that the missing of one payment can lead to enforcement procedures and the lender can take possession of the vehicle importantly without seeking a court order. However there is a proviso to s7 which states: Provided that the grantor may within five days from the seizure or taking possession of any chattels on account of any of the above-mentioned causes, apply to the High Court [local county court in relation to agreements regulated by the CCA 1974], or to a judge thereof in chambers, and such court or judge, if satisfied that by payment of money or otherwise the said cause of seizure no longer exists, may restrain the grantee from removing or selling the said chattels, or may make such other order as may seem just. xvi The bill of sale form says that “chattels”, namely secured property, shall not be liable for seizure or be taken possession of “for any 6 cause other than those specified in section 7 of the Bills of Sale Act (1878) Amendment Act 1882” – not particularly informative to the average consumer. Further there is not currently a requirement for the provisions of s7 BSA 1882 to be set out in the lender’s agreement with the consumer. The notion however that the type of vulnerable already cash strapped consumer who takes out this type of loan will make use of the proviso is largely fanciful. It is true that by virtue of 7A BSA 1882 the lender must serve a default notice which gives the debtor 14 days to try rectify matters and pay off arrears and this may lead to advice being taken and an application being made to the court to restrain repossession but again it assumes the court will be sympathetic and that a pressured consumer will take such steps. Even enforcement officers may not fully appreciate the scope and operation of the obscure legislation (see Consult para 37). It is also true of course that more sophisticated borrowers can seek to take advantage of the complexity of the Act to try and evade their debts as the Consultation Document points out: “The very archaic formalities of the Bills of Sale Acts can also be disadvantageous for lenders. Even a minor technical error can mean that the bill of sale is void. This differs from the Consumer Credit Act 1974 (CCA), where a breach of the formal requirements for a secured loan does not necessarily make the agreement unenforceable. Instead, the court is granted discretion to decide whether or not it remains enforceable (section 129(1)(b)(i) of the CCA) (Consult para 38).”xvii In many cases the provisions of the Bills of Sale legislation are being ignored and borrowers are ignorant of the protections provided by the legislation. Even today the scope and boundaries of the legislation is unclear and can catch even fairly sophisticated business arrangements in a web of technical requirements. This is illustrated in the recent case of Chapman v Wilson  EWHC 1746 (Ch) 16/7/2010 in this case a sole practitioner had entered into a loan facility to fund upfront expenses connected with conditional fee agreements and as security the lender took a mortgage over his goodwill, book debts and work in progress and an assignment of his cases and client contracts. The solicitor had serious financial difficulties and 7 appointed a receiver and the judge had to grapple with a number of issues under the legislation: (a) was the loan agreement a bill of sale within s4 BSA 1878; (b) were solicitors files capable of being ‘personal chattels’ within s4; (c) could clauses in the agreement covering after-acquired future property be regarded as within the scope of the Act (d) what was the effect of non-registration of an agreement and in particular whether the doctrine of severance could be applied to save non-void parts of the agreement and (e) was the Loan Agreement in the correct form to comply with s9 BSA 1882. The judge concluded the arrangement re seizure of the files was not a bill of sale, a security arrangement, but merely a contractual right to take possession of the files. The judge concluded that if the loan agreement had contained a bill of sale even if other parts of it were not covered by the legislation an those parts were not to be held void even if the bill of sale element was (para 80).xviii The solicitors files were either ‘personal chattels’ as pieces of paper or “other articles capable of complete transfer by delivery’ within s4 BSA 1878 (para 88). Surprisingly at this late stage in the history of the legislation the position of clauses covering ‘after-acquired’ property was still openxix and after canvassing the authorities and not following the view of the great commercial law lord Lord McNaghtenxx the judge concluded that after acquired property clauses could come within the scope of the legislation (paras 92101). In this he preferred to follow the decision of BrowneWilkinson VC in Welsh Development Agency v Export Finance Co Ltd  BCLC 936 @ pp 956-57 Key concerns are that: current legislation does not provide consumers who used bills of sales loans with sufficient protections, especially when compared to similar Consumer Credit (CCA) regulated agreements; wording in a bill of sale agreement is complex and difficult for consumers to understand; there is unfair treatment by some lenders of consumers who experience difficulties or fall into default; many consumers do not understand that they no longer own the asset (the car) whilst the loan is outstanding. 8 Nor do they understand the implications that a bill of sale loan may have on their car insurance and the lack of protection for innocent third parties who unknowingly buy a car with a bill of sale attached.xxi The consumer credit regime does impact on the field: mortgage lenders will have to hold a consumer credit licence and the OFT has extensive powers to act in cases where they are unhappy with the conduct of the mortgage lenderxxii; borrowers can argue that the transaction is unfair because of the high rate of interest and related chargesxxiii; lenders have to issue a default notice before they can take steps to enforce the agreement (ss87-89 CCA 1974); In practice judges have been prepared to uphold chattel mortgage agreements with quite high rates of interest because of the degree of risk the lender is taking with minimal credit checks and a willingness to lend to borrowers with very poor credit records. For example in Nine Regions (t/a Logbook Loans) v Sadeer, Case NO 8QT25415, Bromley County Court, 14/11/2008 (Case 2 on OFT Unfair Transactions Page) the judge declined to hold that a loan secured by a bill of sale for £880 repayable over 58 weeks at 7% per month (384.4% APR) unfair as a breach of s140A CCA 1974. Although the rate of interest was high such loans were ‘last resort ones’ made to borrowers with poor credit records; the only security was a second hand car which by definition depreciated in value over time; the rate of interest was competitive in the area and although the entitlement of the creditor to seize the car if the instalments were not paid and without a court order was harsh the borrower had been told in advance and had been given a large number of chances, which were not taken advantage of, to prevent recovery and sale.xxiv In Morrison & Morrison v Betterpace Ltd (t/a Log Book Loans), Case No 9 LO 00559, 1/9/2009 (Case 7 on OFT Unfair Transactions Page) there were two successive log book loans, the first to the husband at 343.4% APR and then a second roll-over loan to his wife for £2340 repayable over 58 weeks at 485.25% APR – the judge treated them as related transactions and ruled that seizure of the couple’s car was fair within s140A CCA 1974 and refused to order its return under s140B(1)(b) CCA 1974 – the husband had made no payments for 10 months and not contacted the lenders at all during that time. However the judge 9 found the circumstances of the loan to the wife was out of the ordinary – no new money was being advanced and the wife was taking over responsibility for repaying the husband’s debt. The creditor did not explain to the wife that the interest charged on the loan would not be 343.3% as charged to the husband but 485.3% which was the rate applicable to new loans at the time of the second agreement. The judge concluded that this was a significant increase and unfair and so ordered a reduction to the original 343.3% under s140(b)(1)(f) CCA 1974. In Shaw v Nine Regions Ltd  EWHC 3514, 18/11/2009 (QB) A loan was secured by a bill of sale for £3,000 repayable over 156 weeks at an interest rate of 119.16% per annum (341.9% APR). Reversing a decision of the Recorder the judge concluded that (allowing for the statutory rebate that was available on early repayment under the agreement) the agreement was not unfair and the borrower remained liable for the total amount subject to any deduction for early repayment and the creditor was entitled to recover the costs from the borrower. This was typical of the type of short term arrangement which characterizes the area as Roderick Evans J stated at paras 8-9: There is no doubt that the claimant fully understood the terms of the Loan agreement into which he entered. Not only did he sign the statement when he entered the agreement saying that he had read and understood the Terms and Conditions of the Agreement, (and also stating that he found them to be fair and reasonable, a matter upon which the Recorder ultimately placed no weight), but the claimant had also, wisely, carried out research in the sub prime market before he took out this loan. The claimant wanted the money immediately so that he could go on holiday. It was the ease by which the money could be obtained which attracted him to this kind of agreement, and before taking out the loan he had already formed the intention to repay it as soon as possible from the proceeds of an insurance claim which he anticipated would be settled in the near future. However the borrower’s was unable to pay off as rapidly as he wanted when the insurance claim was settled promptly. The borrower paid off the capital but refused to make further payments contending the agreement was unfair, arguing that an APR of 30% 10 would have been reasonable. Ultimately the interest rate was not reduced on appeal – as the Recorder had stated: “…….. claimant was prone to very bad financial judgment, but concluded, also, that he was a sophisticated, articulate and intelligent man who knew exactly what the terms of the Agreement were after having given them careful consideration. He accepted the loan was for the purpose of going on holiday, rather than because of any financial pressure upon the claimant and that the claimant could afford this loan.” (@ para 29)xxv In addition under the BSA a borrower can apply to the court for relief from seizure of their property. Most of the players in the consumer field are operating in the sbuprime market and there have been growing concerns about market abuses and the taking advantage of desperate vulnerable borrowers - one major player in the field has been the subject of a ‘minded to revoke’ notice, issued by the Office of Fair Trading in respect of their consumer credit licence. The firm is challenging and some preliminary issues were ruled on in the First Tier Tibunal (Grand Regulatory Chamber) decision in Nine Regions (trading as Log Book Loans)xxvi The loan business was carried on by Nine Regionss (NR) as ‘franchisee’ of Log Book Loans (LBL) through chains such as Cash Convertors and Cash Generators who were alleged to be ‘agents’ of NR for these purposes. The actual transaction was initiated usually by telephone by an ‘underwriter’ of NR – the agreements were signed usually at one of the agent’s stores – though sometimes in an adjacent car park or a small local independent newsagent. At these meetings it was the only occasion on which a customer would have to consider the precontract information, as well as the agreements. The OFT alleged that the bills of sale had not been properly witnessed under s10 BSA 1882 which requires: The execution of every bill of sale by the grantor shall be attested by one or more credible witnesses, not being a party or parties thereto.’ - the Tribunal agreed that the ‘underwriters’ were not acting in a personal capacity but as agents of NR and therefore could not be regarded a either a ‘credible witness’ who was not a party to the transaction. Further the Tribunal agreed with the OFT that the firm was in breach of ss48/49 CCA 1974 in canvassing debtor-creditor agreement off trade premises – as using their agents stores as places where discussions and signatures of the agreement took place could not 11 be regarded as either permanently or temporarily carrying on business there themselves.xxvii There were failures to ensure that the bills of sale were registered within the appropriate seven day period required by the legislature. Use of expressions in telephone text messages such as ‘loan guaranteed’ or ‘pre-approved’, with no accompanying APR shown were inn breach of regs 8(1)(d)xxviii and 9(1)(d) of the Consumer Credit Advertisement Regulations 2004xxix Government Consultation The initial consultation document issued by the Labour Government in December 2009 offered four options for the future of bills of sale: do nothing beyond current legislative and regulatory activitiy; introduce a voluntary code of practice or other nonstatutory regulations; reform of the Bills of Sale legislation; and ban the use of bills of sale for consumer lending. At that time the initial view was for a complete ban: “The Government is minded to ban the use of bills of sale for consumer lending. We believe this will be necessary to guarantee sufficient consumer protection and prevent the harm suffered by consumers through poor business practice. In deciding whether to proceed with a ban or to pursue one of the alternative options, we recognise the importance of seeking to ensure that credit remains available on fair and reasonable terms to consumers who want to borrow and can afford to do so.” (Consult, Executive Summary para 6) Consumer groups support complete ban on use in consumer transactions. The Government’s proposal to consider banning the use of chattel mortgages in relation to consumer transactions was strongly supported by consumer groups, such as Citizens Advice “… lending secured by bill of sale makes up a very small proportion of both the consumer credit market and the consumer credit and debt problems seen by the CAB service. However the experience of CAB clients suggests that consumers can suffer very severe detriment after entering into a credit agreement secured by bill of sale. CAB evidence previously sent to BIS has highlighted our concerns about the lending and arrears management practices of bill of sale lenders. We believe 12 that the nature of the bill of sale lending and in particular the almost total lack of consumer protection is wholly unsuitable in a modern consumer credit market. Therefore we support the government’s intention to ban this particular form of secured lending and introduce effective consumer protection in respect lending secured against chattels more generally.” xxx Two, not untypical, problem cases involving consumers cited in the Citiizens Advice Evidence to the BIS were: “A CAB in Yorkshire saw a 20 year old woman who had taken out a bill of sale loan for £900 at 430% APR. After one missed payment, the agents of the lender repossessed the vehicle in question from the client’s driveway. The woman said that the agent arrived at her property asking for the keys to the vehicle to 'check the mileage'. When she handed over the keys, the agent simply drove the car away. “ (CA Evidence p3) “A CAB in Wiltshire saw a 36-year-old woman who had taken out a loan for £5,000 secured against her car by a bill of sale. The terms of the loan obliged her to repay £35,000 over 36 months. The woman fell into financial difficulties and could not keep up with the repayments. She suffered ill health due to the pressure of the loan and recently had a heart attack. She came to the bureau with her father who was concerned about the amount of interest his daughter had to pay back. The lender had repossessed the woman’s car on the previous weekend as they said they had not received payment, but the woman had sent two cheques over the Christmas period. The woman had to pay £3,000 to get the car released. She was in an extremely difficult financial situation and her indebtedness was increasing at an alarming rate as interest charges and charges for letters and phone calls were being added to the balance. She was worried that she might end up losing her mortgaged home.” (CA Evidence p 3) However the problems are by no means confined to consumer borrowers and problems can arise in relation to business transactions – particularly log-book loans by small businesses or sole traders to acquire a van for work purposes – the van being subject to the chattel mortgage as security for the loan – a not untypical problem case in the business field illustrated by Citizens Advice is: “A CAB in Lancashire saw a 49-year-old man who had taken out a logbook loan for £600 at an APR of 466.94%. The total amount to be repaid was £880 over 3 months by two payments of £93.34 and final payment of £693.34, The security for the loan was the van that the man needed for work as he was self employed. He couldn’t keep up with the payments as per the agreement and accrued interest. As a result he had 13 paid in excess of £2,000 with a balance still outstanding of approximately £1,700 with interest accruing monthly on the balance. The man was finding it hard to comply with the payments as his earnings had reduced considerably due to the financial climate. However to keep working he had to keep the van. He was married with two dependant children in a mortgaged property, with mortgage payments of £1,000 per month.” A total ban on the use of the bill of sale as a security was also supported by The Money Advice Trust in their response to the Labour Government’s Consultative Document: “We feel that bills of sale are an archaic lending product with obscure and complex rules that has no place in a modern society. The lending products offered using bills of sale are both oppressive and enforced unfairly. Consumer protection is inherently untenable given the nature of the legislation. We fully support a ban on bills of sale.”xxxi Government Response to Consultation It is perhaps not surprising given the Coalition Government’s stated desire to de-regulate and to reduce burdens on business that the current Government decided to opt for industry selfregulation as the main component of a reform regime – supplemented by the use of general enforcement powers under the CCA 1974 (as amended): “Following careful consideration of all the responses to the consultation, Government has come to the conclusion that a package of measures based on Option 2 (introduce an industry wide code of practice) is the most appropriate and proportionate way forward. These measures are: “• a code of practice that contains increased protections for consumers, especially for those who are having difficulty repaying the loan; • a consumer information sheet explaining in plain English how bills of sale work and what the customer can expect from the lender; • new Consumer Credit Act requirements from 1 February 2011; • OFT monitoring under Irresponsible Lending Guidancexxxii; and • a commitment to look again at reforming bills of sale for 14 consumer lending if problems continue……. “(Response para 37) “…….the evidence received in response to the consultation did not indicate that the problems identified were sufficient to justify a ban on using bills of sale for consumer lending. There are certainly examples of bad practice by lenders and of consumers experiencing problems with bills of sale loans. But the size of the problem is comparatively small. The value of bills of sale lending is estimated at £38-£40m, compared to £7.5bn for high cost credit generally. It is estimated that a secured vehicle is repossessed as a result of default in only 2%-3% of cases (800-1200 loans out of about 38,000). (Response @ para 39)…………………. “Reforming Bills of Sale legislation to make it more appropriate for consumer lending (Option 3) could deliver additional consumer protection and some benefits for lenders with potentially less of an adverse impact on lending. However, the size of this task compared to the size of the problem and the long time lag before consumers would see any benefits made this an unattractive option.’ (Response @ para 41) ‘ It is disappointing that the what might be considered relatively minor legislative changes to adjust the regime to modern conditions is regarded as a major task, particularly given that the Government is envisaging another major restructuring of the regime to bring into line with the regulation of other financial services and give rule making power to the proposed new Consumer Protection and Markets Authority – the repeal of the outdated legislation the tweaking of the new legislation could surely resolve things quite easily? New Code of Practice & Customer Information Sheet The centre piece of the proposals is the new CCTA Code set out in Annex C of the Response. It only applies to agreements covered by the CCA 1974 regime. It commits the CCTA to monitoring and compliance action including unscheduled compliance audits (Annex C para 2.4) and proper recording of complaints which will be made available to the OFT (Annex C para 2.3). General obligations to trade honestly responsibly, 15 ethically and lawfully are found in Section 3 of the Code and also to ensure staff are properly trained. Member’s interests in assigned vehicles are to be registered within 24 hours with a recognized asset finance register such as HPI Ltd (para3.13). Advertising is to be fair and reasonable and not contain misleading information with an avoidance of high pressure or aggressive selling practices. Prospective borrowers are to be given an adequate opportunity to consider pre-contract information and ask questions (para 4.1.4). In particular: 4.2.1 Members shall not engage in any behaviour that the OFT considers may constitute ‘irresponsible lending’. Members must have regard to: ‘Irresponsible Lending-OFT guidance for creditors’ – August 2010 as amended from time to time.’ Loans structured to have large balloon payments at the end of the agreement will only be used for wholly or predominantly for business purposes (para 4.2.2). Proper explanations and assessment of affordability must be carried out: 4.4.1 Members shall, before granting credit or increasing the amount of credit to be provided to the customer, undertake an assessment of the creditworthiness of the customer to assess the borrower’s ability to undertake any proposed credit commitment, or specific additional credit commitment, in a sustainable manner, without the customer incurring (further) financial difficulties and/or experiencing adverse consequences.’ Section 4.7 sets out how members should deal with customers experiencing financial difficulties. Procedures are to be ‘fair, clear and not misleading’ and ‘consider cases of financial difficulty sympathetically and positively..with understanding and forbearance’. Members are advised to suspend for a minimum period of 30 days active pursuit of the debt where a bona fide debt advisor is assisting the consumer in agreeing a repayment plan (para 4.7.5). Debt collection procedures must comply with the statute and with the OFT Debt Collection Guidancexxxiii. For innocent third parties who buy a car subject to a Bill of Sale the protection afforded by Part III HPA 1964 to good faith private purchasers where the lender has failed to register their interest with an Asset Finance Register Company within 24 hours of the execution of the mortgage over the car (para 5).xxxiv 16 The CCTA commits itself to providing a conciliation service to try and resolve complaints between a borrower and its members and if this fails the customer can of course take the matter to the Financial Ombudsman Service which of course is free to use for consumer debtors.xxxv The new CCTA Customer Information Sheet is set out in Annex C of the Response sets out in plain English the balance of obligations. Persistent breaches of the Code should lead to the imposition of a ‘requirements notice’ under s33A CCA 1974 with the possibility, subject to an appeal to the First Tier Tribunal, of the imposition of civil penalties of up to £50,000 per breach of the notice and ultimately to the revocation of the licence for not being a ‘fit and proper person’ under s25 CCA 1974.xxxvi Enhanced CCA enforcement powers: Enhanced powers under the CCA 1974 regime which came into force on 1 February 2011 will add some regulatory backbone to the self-regulatory code: * lenders will have to make a reasonable assessment of whether a borrower can afford to meet repayments in a sustainable mannerxxxvii; * lenders will have to explain key features of the credit agreement to enable the borrower to make an informed choicexxxviii; * prospective borrowers will be given an information sheet setting out all the relevant information about the credit agreement in a standard format to assist easy comparison and this will be supplemented by the CCTA information sheet on the key features of a bill of salexxxix; and * consumers will have an absolute right to withdraw from a credit agreement within 14 days, paying back only the money lent and the interest accrued over that time.xl In addition civil enforcement orders can be obtained for breach of consumer credit legislation under Pt 8 of the Enterprise Act 2002 – breach of which can lead to imposition of penalties for contempt of court.xli In addition plans are being made to introduce direct powers to impose penalties by bodies such as the OFT with the defendant having a right to appeal to the First Tier Tribunal which should again cut down the time before an effective penalty can be 17 imposed.xlii A different future While the new Code of Practice is no be welcomed it is suggested that more radical reforms are necessary in addition to the backing up of the code with strong enforcement of the consumer credit regulatory regime. It is suggested consistent with the Government’s de-regulatory agenda both the BSA 1878 and BSA 1882 be repealed. Chattel mortgages falling outside the Consumer Credit Act 1974 (as amended) be left to be regulated by the common law and industry self-regulation. Those falling within the consumer regulatory regime should be more effectively absorbed into the regime by consideration of a combination of some reforms of the CCA 1974 and effective use of already existing powers.xliii Key points of such a regime might be: a possible extension of the provisions in ss58 and 61 covering pre-contract reflection periods for regulated real property mortgages at least for loans say in excess of a minimum level (possibly £5,000); rigorous enforcement of extended licensing powers – in particular power to enforce ‘requirements’ where OFT dissatisfied with conduct of mortgage provider; strict enforcement of the irresponsible lending guidelines to require creditors to more seriously consider whether the borrower can afford the financial commitment and not lazily to rely simply on the security of the chattel offered as security; an extension of the protected goods provisions (ss90-92 CCA 1974), currently applicable only to hire purchase and conditional sale agreements to cover regulated chattel mortgage agreements – this would mean that after onethird of total cost of the loan had been repaid a court order would be needed to repossess the chattel – this would also permit the borrower to suggest to the creditor a repayment plan based on the time order provisions in s129 CCA 1974xliv a modernized consumer chattel mortgage agreement forms issued under s60 CCA 1974 and implementing regulations; a full extension of debtor protection provisions – including possibly extending court order provisions in s126 CCA 1974 to cover consumer chattel mortgage provisions at least where the value of the loan justified it; 18 repeated non-compliance with the CCTA Code of Practice to be ground for revoking of lender’s licence. It is argued that regularizing in a modern form lending secured by a chattel mortgage will remove such lending from the fringes of sub-prime credit to play a more significant part in securing lines of credit and at more moderate rates of interest in these more austere times. i Thomas v Kelly (1888) L.R. 13 H.L. 506, per Lord MacNaghten @ p 517. Carl Richard Chapman (trading as Chapman & Co Solicitors) v Wilson & Others  EWHC 1746 (Ch) Vos J @ para. 129 iii In this article the focus in on the law of England and Wales, chattel mortgages are found in Northern Ireland but not the Scottish legal system. iv http://www.bis.gov.uk/assets/biscore/corporate/docs/migratedconsultations/a%20better%20deal%20for%20consumers%20consultation%20on%20 proposals%20to%20ban%20the%20use%20of%20bills%20of%20sale%20for%20con sumer%20lending.pdf v http://www.ccta.co.uk/index.aspx vi http://www.bis.gov.uk/assets/biscore/consumer-issues/docs/g/11-516-governmentresponse-proposal-ban-bills-of-sale.pdf vii Response, Introduction para 3 – the typical cost of a £750 loand for 6 months being between £1300 and £1500 (Response para 12). viii We are concerned here only with use of chattel mortgages by individuals not lending to corporate borrowers using fixed or floating charges. ix (1888) L.R. 13 App Cases 554 @ p560-561 – in the case the House of Lords had to decide whether the transaction was a sale accompanied by a hire-purchase transaction or a loan financed by a security – a wagon hire company purchased the wagons from the original owners and then leased them back to the company who had been hiring them from the original owners at a rental for 3 years with an option to purchase at the end of the lease – the rental payments equalled the purchase price plus interest at 7% so it was argued it was a loan but looking at the ‘substance of the transaction’ the view was taken that it was a sale not a security transaction. x The concept of registration is not defined and even today there is some doubt as to precisely when the process is complete – see where the issue was whether bills were routinely registered outside the 7 day period – the licenses claimed that bills which were received within the 7 day period but stamped with a date outside the 7 day period should be treated as validly registered – the First Tier Tribunal of the Regulatory Grand Chamber took the view that registration must be the entering of the bill on the register – and that the date of the court’s stamp on the bill is not conclusive of the date on which the bill was registered. ii 19 xi Moorgate Mercantile Co v Twitchings  AC 890 and Industrial Corporation Finance Ltd v Wyder Group Ltd (2008) 152 (37) S.J.L.B. 31. xii Not all loans raised on the security of chattels are covered s4 BSA 1878 – and see In Re Reis  2 KB 769 (covenant by husband to transfer all his after-acquired property (except business assets) to the trustees of the settlement upon trusts for te benefit of his wife and children not required to be registered as a bill of sale xiii Helby v Matthews  AC 471 & Lee v Butler  2 QB 318 – holders of Bills of Sale may be vulnerable where they lend money to on the security of a chattel which the debtor has previously acquired on hire purchase and the finance company has failed to register its security interest with one of industry asset registers such as Hire Purchase Information Ltd (HPI) – see Welcome Financial Services Ltd v Nine Regions Ltd (t/a) Log Book Loans (2010) 2 Ll Rep 426 – W, a finance company had let a car on hire-purchase to a debtor – the debtor then entered into a ‘no credit check’ chattel mortgage with N on the car before title had passed from the finance company when the debtor defaulted on the loan N seized the car and sold it – when sued for wrongful interference with goods by W, N claimed to be a good faith private purchaser within s27 Pt III Hire Purchase Act 1964 – and therefore to have acquired a statutory title – the judge ruled that they were not private purchasers within the definition in s29 HPA 1964 – it was irrelevant that the finance given was not for the acquisition of the car – the Act covered not only the provision of finance to purchase the car but also where the car was used as security for a loan. Thus W was entitled to the proceeds of the sale of the car by N. xiv See Eastern Distributors v Goldring  2 QB 600, Stoneleigh Finance v Phillips  2 QB 537, Snook v London & West Riding Investments Ltd  2 QB 786 and Kingsley v Sterling Industrial Securities  2 QB 747. xv Online Catering v Frank Acton & Others  3 All ER 869 – the defendant carried on a business repairing and servicing motor vehicles and did this for the claimant catering company – the defendants claimed to be entitled to seize and retain possession of two of the claimant’s vans for nonpayment of service charges – the judge held that the right in the contract allowing them to do this as a licence to take possession of personal chattels as security for a debt and should have been registered under s8 BSA 1878, the agreement being with the managing director of the company – the Court of Appeal ruled that while this right could constitute a bill of sale the Act did not apply as the agreement was with the company, a corporate body, not the managing director personally. xvi Any good seized must not be sold until a minimum period of five days have expired – s13 BSA 1882 – see O’Neil v City & County Finance Co Ltd (1886) L.R. 17 Q.B.D. 234 & Hetherington v Groome (1883-84) L.R. 17 Q.B.D. 789 xvii It shows some of the complexity of the area that the writer of the document includes the wrong section s129 refers to the making of time orders to give a debtor more time to pay the correct section iss127 in relation to the making of enforcement orders which since April 2007 has permitted the enforcement of all ‘improperly executed’ agreements where the debtor has suffered no significant prejudice and with powers to neutralize that prejudice by varying the agreement or adding conditions to the enforcement order under ss135-136 CCA 1974 – see Wilson v First County Trust Ltd (No 2)  1 AC 816 – the practical effect of which was reversed from 6April 2007 by Consumer Credit Act 2006 Sched 4 para 1 – removing all mandatory grounds for refusing to enforce an agreement – now all agreements subject to judicial discretion. 20 xviii Applying the views of Fry LJ in RE Burdett (1888) 20 QBD 310 @ 315-6 and In Re North Wales Produce and Supply Society Ltd  2 Ch 340. xix After acquired property clauses are only valid against the grantor unless specifically permitted in relation to third party creditors see s5 & 6 BSA 1882. xx Thomas v Kelly & Baker (1888) 13 HL 506 @ pp518-19 – the majority in the case decided that the clause was not in the appropriate form as required by s9 BSA 1882 and therefore void – in that there had been a failure to comply with the statutory requirements of a bill of sale by including an assignment to after acquired property in the body rather than the schedule of the deed. xxi See Response (2011) para 16. xxii See Part III CCA 1974 – in particular s25& 25A requirement that the licensee be ‘a fit and proper’ person, the power of the OFT to impose ‘requirements’ if dissatisfied with the licensee’s conduct backed up by civil penalties of up to £50,000 for breach of those requirements (ss33A & s39 CCA 1974). xxiii S140A CCA 1974 and illustrations of unfairness cases on OFT Unfair Transactions Page: xxiv See digest of case on OFT page on Unfair relationships http://www.oft.gov.uk/about-the-oft/legal-powers/legal/cca/CCA2006/unfair/unfairrel-full/ xxv Borrowers are not always honest – see Mannion v Nine Regions Ltd, Oxford County Court, 7DVL19259, 18/5/10 – were a case failed in part due a misrepresentation made by the borrower that he was employed when in fact unemployed (see Case 21 OFT Unfair Relationships Page http://www.oft.gov.uk/about-the-oft/legal-powers/legal/cca/CCA2006/unfair/unfairrel-full/ xxvi  UKFTT (GRAC) 643 xxvii Being therefore in breach of s48(1) & (2) CCA 1974: (1) An individual (the “canvasser”) canvasses a regulated agreement off trade premises if he solicits the entry (as debtor or hirer) of another individual (the “consumer”) into the agreement by making oral representations to the consumer, or any other individual, during a visit by the canvasser to any place (not excluded by subsection (2)) where the consumer, or that other individual, as the case may be, is, being a visit— (a) carried out for the purpose of making such oral representations to individuals who are at that place, but (b) not carried out in response to a request made on a previous occasion. (2) A place is excluded from subsection (1) if it is a place where a business is carried on (whether on a permanent or temporary basis) by— (a) the creditor or owner, or (b) a supplier, or 21 (c) the canvasser, or the person whose employee or agent the canvasser is, or (d) the consumer. – and therefore an offence under s49(1) CCA 1974. xxviii Consumer Credit (Advertisements) Regulations 2004/1484 reg 8(1)(d): - a credit advertisement shall display a typical APR where it: ‘includes any incentive to apply for credit or to enter into an agreement under which credit is provided.’ xxix Regulation 9(1)(d) stipulates that no regulated credit advertisement shall include ‘the expression “loan guaranteed” or “pre-approved” or any similar expression, except where the agreement is free of any conditions regarding the credit status of the debtor’ xxx Citizens Advice Responses to the Department of Business, Innovation and Skills consultation on proposal to ban the use of bills of sale for consumer lending: Evidence (March 2010), Introduction p2 (hereinafter ‘CA Evidence’) http://www.citizensadvice.org.uk/proposal_to_ban_the_use_of_bills_of_sale_for_con sumer_lending xxxi Money Advice Trust: Proposal to ban the use of Bills of Sale for Consumer Lending Consultation Paper: Response by The Money Advice Trust (March 2010) @ p10. www.moneyadvicetrust.org/MAT%20response%20to%20consultation% 20on%20proposal%20to%20ba... xxxii See’ Irresponsible Lending: OFT guidance for creditors’ (March 2010, Updated February 2011) OFT 1107 - http://www.oft.gov.uk/about-the-oft/legalpowers/legal/cca/irresponsible#named1 xxxiii see ‘Debt collection: draft OFT guidance for creditors, debt collectors, law firms and other businesses engaged in the recovery of consumer debt (OFT 664 con) March 2011 - http://www.oft.gov.uk/about-the-oft/legalpowers/legal/cca/irresponsible#named1 xxxiv Part III of the Hire Purchase Act 1964 is long overdue for reform and modernization not covering chattel mortgages or the leasing of cars for instance. xxxv See Financial Ombudsman Service website - http://www.financialombudsman.org.uk/publications/technical_notes/consumer_credit_resource.html xxxvi See ‘Consumer credit licensing: General guidance for licensees and applicants on fitness and requirements’ OFT 969 (Jan 2008): http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/oft969.pdf and see examples of imposition of specific requirement notices – OFT Press Releases 22/11, 81/10 and 21/10 - http://www.oft.gov.uk/news-and-updates/press/ xxxvii S55B CCA 1974 xxxviii s55A CCA 1974 – in particular the following features: (a) the features of the agreement which may make the credit to be provided under the agreement unsuitable for particular types of use, (b) how much the debtor will have to pay periodically and, where the amount can be determined, in total under the agreement, (c) the features of the agreement which may operate in a manner which would have a significant adverse effect on the debtor in a way which the debtor is unlikely to 22 foresee, (d) the principal consequences for the debtor arising from a failure to make payments under the agreement at the times required by the agreement including legal proceedings and, where this is a possibility, repossession of the debtor's home.. (e) the effect of the exercise of any right to withdraw from the agreement and how and when this right may be exercised. xxxix See Consumer Credit (Disclosure of Information) Regulations 2010/1013. xl S66A CCA 1974. xli Such orders can be obtained by the OFT and other recognized enforcement bodies such as local trading standards authorities see example of an interim order obtained by Birmingham Trading Standards Authority – “Injunction secured against ‘debt sale’ firm, OFT Press Release 43/10, 26/4/10 - http://www.oft.gov.uk/news-andupdates/press/2010/43-10 xlii see ‘OFT & LBRO outline plans for use of new civil sanctions’ OFT Press Release 147/10, 20/12/2010 – implementing on a pilot basis Pt 3 Regulatory, Enforcement and Sanctions Act 2008 - http://www.oft.gov.uk/OFTwork/consultations/current/civilsanctions/ xliii This reform may be made easier if the Government go ahead with a proposal to bring the regulation of consumer credit legislation into line with the regulation of other financial services on the model of the Financial Services and Markets Act 2000 with the rule making powers vested in a new Consumer Protection and Markets Authority which would remove the need for time consuming and usually long delayed reforms of primary legislation, see ‘A new approach to financial regulation: Consultation on reforming the consumer credit regime’ (BIS December 2010) http://www.bis.gov.uk/Consultations/consultation-reforming-consumer-credit xliv Bearing in mind also the powers of the courts to vary the agreement and impose conditions in connection with such orders in ss135 & 136 CCA 1974 – but the court would have to take into account the interests of the creditor and that there was a realistic chance that the loan and interest would be repaid over a reasonable period – see First National Bank v Syed  2 All ER 250 & southern District Finance v Barnes  1FCR 679.
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