When the Moores recently asked their building society to extend their mortgage to pay for home improvements, they were amazed to discover that Lloyds still held a second charge on the house.
What Mrs Moore discovered when she contacted her local bank branch was that Lloyds had not simply made a mistake. 'I was horrified to find that standard banking practice is never to remove a second charge, in case clients want funding in the future. I feel that the vast majority of people assume that as soon as the loan has been repaid the charge is removed,' she said.
The Lloyds loan in 1982 helped the Moores to buy some woodland adjoining their home in Colchester, Essex. Now the Moores have plans for further developments to their house and garden, and have equity available to enable them to increase their mortgage.
'But we could have been refused funding because a second charge existed when in fact the bank has no claim on our house,' said Mrs Moore.
A Lloyds Bank spokesman initially told the Independent that the Moores' branch had simply been in error. However, he later confirmed that Lloyds does not automatically remove security on repaid loans, and does not even necessarily advise customers of their right to have this done. 'In theory, when a secured loan is repaid the branch should write to the customer and ask what he or she wants to do. In practice, this doesn't happen on occasions,' he said. He added that the bank's policy in this area was 'under review'.
The message from other banks suggests that their customers need to be equally vigilant. Midland says that it does not automatically cancel charges on repaid loans. 'We do require customers to ask us,' said a spokesman. 'We would inform them that the borrowing is repaid, either by sending them a letter or a closing statement, and then it's up to them.'
Barclays and NatWest operate on the same basis. 'There is not an automatic mechanism for discharging a security. We don't as a matter of course do it - we may very well hang on to the security,' said Barclays. 'There is no automatic release mechanism,' echoed NatWest.
The argument the banks advance for maintaining what amounts to a formidable legal power over their customers' assets - even when there is no loan outstanding - is that this is simply a convenient precaution in case the individual wants to borrow again in the future. 'Taking security can be an expensive process. If a loan is repaid it makes sense to say to the customer, 'if you think you're going to have another borrowing requirement, do you want to go through the process again?',' said NatWest.
This presupposes, however, that customers are being asked their preferences.
The situation facing business customers is even less straightforward. The banks point out that the nature of business borrowing, especially through renegotiable overdraft facilities, makes it sensible for charges to be maintained. However, the banks clearly have a commercial interest in holding security, to protect them should the business become insolvent in future. Business borrowers who agree to legal charges being taken when they first set up their company may be surprised to realise that the charges are likely to remain more or less indefinitely.
The newly revised Code of Banking Practice launched last Tuesday has not been extended to small business customers and in any case personal customers will find that the code offers them little assistance in this area.
The onus clearly remains with the customer to ensure that the bank relinquishes security when it is no longer appropriate, something the Moores have now arranged with their Lloyds branch.
An even better option, perhaps, might be to try to persuade the bank not to take security in the first place.
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