A loan rate that won't budge: With controls on lending under review, Maria Scott highlights one problem

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The Independent Online
LEGAL controls over consumer loans could be radically shaken up as a result of a review announced by the Office of Fair Trading this week.

Loans of up to pounds 15,000 are covered by the Consumer Credit Act, which controls their marketing and the policing of credit brokers.

The Office of Fair Trading is suggesting there may be a case for dismantling some of the regulations at present imposed on lenders, a move that would be viewed with concern by the Consumers' Association.

While it welcomes the OFT's suggestion that the pounds 15,000 limit be raised to pounds 30,000, the association believes that the act needs improving rather than dismantling.

The Office of Fair Trading may come under pressure to consider the experiences of people such as Martin Engleman.

Like many borrowers, he has found himself stuck with a loan on which the interest rates have not fallen, even though the terms of his contract allow for this.

Mr Engleman took out a pounds 28,000 second mortgage on his home in Woodford Green, Essex, in 1990 with the Consumer Loans Company, a division of National Home Loans, the publicly quoted mortgage lender. He needed the money to pay off business debts.

The interest rate on the Consumer Loans mortgage in 1990 was 1.46 per cent a month, which worked out at an annual percentage rate of more than 17 per cent. It was a variable rate and Mr Engleman expected it to come down with falling base rates.

He deliberately rejected a fixed rate loan at the time for this reason. When he raised the loan the bank base rate was 15 per cent.

But his loan rate did not come down and he is still paying more than 17 per cent annually. The bank base rate is now 6 per cent.

Mr Engleman's mortgage was a deferred rate one, meaning that interest has been added to the original debt in order to keep monthly payments down.

That deferred rate period has now expired and at the end of June the Consumer Loans Company wrote to Mr Engleman advising that his monthly payment was going up to pounds 456.62, an increase of pounds 120.

Mr Engleman now works for a firm of insurance brokers but says that he has dipped into savings to keep up his mortgage commitments, now a total of pounds 140,000.

He would like to remortgage, but he and his wife earn pounds 42,000 a year between them and do not expect many lenders to see that as sufficient income to support total mortgage borrowings of pounds 140,000.

The Consumer Loans Company's parent, National Home Loans, ran into difficulty early in the recession in the face of mounting arrears and falling mortgage business. It was forced to refinance and had difficulty raising money to lend at competitive rates.

Colin Sanders, general manager of Consumer Loans, said: 'With our loans being second mortgages, it is even harder to maintain competitive rates than it is for NHL.'

However, he added that the company would not normally reduce the rate on a second mortgage such as Mr Engleman's, even though it was a variable rate contract.

Contracts for variable rate mortgages normally allow the lender discretion over the rate and there is little borrowers can do to defend themselves against a failure to bring rates down.

Under the current terms of the Consumer Credit Act borrowers have the right to challenge allegedly extortionate rates on loans up to pounds 15,000 in the courts. But there is no definition of extortionate, which puts borrowers on shaky ground.

The Consumers' Association said a rate of 17 per cent probably would not be viewed as extortionate.

The Office of Fair Trading is to hold public hearings on the Consumer Credit Act. The first will be on 27 and 28 October at Glaziers Hall, 9 Montague Close, London Bridge, London SE1, starting at 10am.

The second will be on 2 November at the Department of Trade and Industry (Yorkshire and Humberside), 25 Queen Street, Leeds, starting at 10.45am.

Copies of the OFT's consultation document on the Act are available free by telephoning 081-398 3405.

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