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Extortionate lending
In this case the unfortunate Mr & Mrs Meadows borrowed 5,750 but ended up owing in excess of 300,000. At first instance the judge held that:The total charge for credit of 5,750 had been misstated, by including payments of arrears (2,600) and insurance premiums (750);
It was an extortionate credit bargain;
The default payments amounted to a penalty;
In the absence of any prejudice, the court would permit the lender to enforce the agreement in the absence of the lenders signature;
The court would have been prepared to make a time order under s 129 Consumer Credit Act 1974. On the facts, the judge declared that the borrowers were no longer indebted to the lender so that the legal charge should stand redeemed. London North appealed on all the points.
As will be seen one only issue was considered by the Court of Appeal: Was the cost of credit misstated?
The judgment of the Court of Appeal was given by Lloyd LJ. He referred to Watchtower Investments Ltd v Payne [2001] EWCA Civ 1159 and the conclusion in that case that if the credit used to discharge the arrears on the first mortgage was a charge payable under the transaction by or on behalf of the debtor to the creditor the agreement is not enforceable and the court has no discretion to make an enforcement order. On the facts of that case, the court had held that the arrears were part of the credit, not part of the total charge for credit, because it was an objective purpose of the agreement that the arrears should be paid off out of the loan. A different conclusion had been reached on the facts of McGinn v Grangewood Securities Ltd [2002] EWCA Civ 522.
Lloyd LJ then reconsidered the evidence and, differing from the judge, held that Mr Meadows had agreed that the arrears would be paid off out of the loan advance, so that the discharge of the prior mortgage arrears was part of the purpose of the loan by the time the Meadows signed the agreement. Consequently he held that the amount of credit had not been wrongly stated by failing to deduct the amount used to pay off the arrears.
However, having considered the Consumer Credit (Total Charge for Credit) Regulations 1980 (being the relevant regulations in force at the time) Lloyd LJ concluded that the insurance premium would form part of the total charge for credit unless it was excluded by regulation 5(1)(c) which provides:5 Items excluded from total charge for credit
(1) The amounts of the following items are not included in the total charge for credit in relation to an agreement(c) any charge relating to an agreement which is an agreement to finance a transaction of a description referred to in paragraph (a) or (b) of section 11(1) of the Act, being a charge which would be payable if the transaction were for cash The relevant part of Regulation 11 provides as follows:11 Restricted-use credit and unrestricted-use credit
(1) A restricted-use credit agreement is a regulated consumer credit agreement(b) to finance a transaction between the debtor and a person (the supplier) other than the creditor After a careful and detailed analysis of the facts, Lloyd LJ concluded that the lender had required the borrowers to take out the insurance policy so that it was a charge which formed part of the total charge for credit within regulation 4(b) and that it had not been taken out of the calculation of the total charge for credit by regulation 5(1)(c). He therefore agreed with the conclusions of the judge.
The appeal was therefore dismissed on this ground alone. The total charge for credit had been misstated. It should have been 5,000 not 5,750. This was a breach of the Act which could not be overcome and the agreement was therefore unenforceable. The court did not express a view on any of the other issues.
Comment: The ratio is pretty clear. Misstate the total charge for credit and the agreement is unenforceable. Whether it is misstated will in turn depend on the application of the total charge for credit regulations and a careful analysis of the particular facts. Consumer credit litigators can at least take this much from the decision. Unfortunately, notwithstanding a plea by counsel for the lenders for clarification on all the other issues, the Court of Appeal refused to oblige. That may be a good thing for borrowers since they can at least continue to invite judges at first instance to adopt the same broad-brush approach on the facts on issues such as penalty or extortionate credit bargain, an approach that did not attract any criticism from the Court of Appeal.
London North Securities Limited v Meadows [2005] EWCA Civ 956
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