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Caught between a duty of care and reality
BOB SOUSTER examines the moral obligation of the banks when it comes to the sensitive and topical subject of home repossession.
RST Bank plc is a major retail banking services provider, with a large mortgage book comprising mainly residential mortgages. It has become involved in a controversy relating to a possession case that was concluded last year.
The issue concerns a family that lost its home because the main income earner left the marital relationship, abandoning his wife and three children. He subsequently made no effort to help the family with the mortgage, even though his name remained on the contract.
As he moved abroad with his new partner, he was out of reach of any bodies that could pursue him to provide support. Having tried to enter into several arrangements with the occupiers of the property, RST Bank plc accepted that it would not be possible for the family to service the mortgage commitment in the foreseeable future and decided to instigate proceedings for possession. After imposing a suspended possession order, the bank ultimately obtained possession and the house was placed on the market.
The possession occurred at an exceptionally bad time, as the housing market was depressed, with little buyer activity. The property in question was located in a town in which a large employer had closed down, thereby reducing still further the potential for anyone interested in the property to have the confidence to buy. Furthermore, the property has not been maintained in good order, and similar properties in the same area were selling for lower prices than that asked by agents acting for the bank.
Eventually the property was sold at a small loss. Worse still for the family concerned, the lender claimed on an indemnity policy to reduce the loss, and the insurance company gave notice to the family that it would pursue the monies paid under its right of subrogation.
The case came to the attention of the regional television company, which featured an interview with the family on its peak time news programme. The interviewer took the opportunity to question the morality of modern lenders who, he said, “paid little regard to the consequences of their actions on those who pay their salaries”. Ironically, the interviewer himself had a mortgage with RST Bank plc and was himself in substantial arrears.
The fact that the news journalist who criticised the bank had his own financial difficulties is something that the bank has to accept. Like politicians, journalists can occupy the high moral ground while adopting questionable behaviours themselves, knowing that the bank has a solemn duty of confidentiality. It would be immensely satisfying to the bank to be able to expose this, but of course it has no right to do so.
How should the bank respond to the criticisms?The case is very typical of the practical problems faced by both lenders and borrowers during the credit crisis. Many of those who bought homes during the 1980s did so with an expectation that the property would not only provide immediate housing needs but also offer a good hedge against inflation over the long term. Residential property has indeed served owner-occupiers well over many years, but the market does encounter intermittent crises, sometimes of a prolonged nature, during which it is difficult or impossible to sell properties without suffering a loss.
The moral duty of lenders to help borrowers experiencing financial difficulties is underpinned by considerable legal responsibilities. Under the Mortgage Conduct of Business Rules, lenders must regard possession as a last resort, having explored all alternative means of resolving the problem. One must assume that RST Bank plc met its legal obligations in this regard, but there is still the controversial issue of the extent to which the bank should minimise the potential losses of the customer after the property has been taken into possession.
The actions of the insurance company in respect of the indemnity policy are legally correct, in that the policy insures against risk of default and does not insure away the obligation of the borrower to pay. This could, however, be a nasty surprise to the customer in this instance, especially if the ramifications of paying a higher lending charge were not fully understood at the time of the mortgage application.
Case law establishes that lenders owe a duty of care to the borrower to obtain the best practicable price obtainable, but at the same time there is no compulsion to “nurse the security indefinitely” (Reliance Permanent Building Society v. Harwood-Stamper 1944). In some cases, lenders may even be required to pay compensation if it is found that the lender’s agent did not take all necessary steps to secure the best sale price.
This occurred, for example, in the case of Cuckmere Brick Company Limited v. Mutual Finance Limited (1971), when the particulars of sale of a commercial property omitted any reference to planning consents that would have enabled the property to be sold at a higher price than that obtained.
If the lender has no obligation to hold on to the property, at what stage should the decision be taken to divest? This is a highly subjective issue, and probably the most pertinent one to this case.
Even in a depressed property market, delaying the sale of a property may do the lender no favours. The mortgage debt usually increases disproportionately in relation to repayments due, as the costs of managing the property continue to build up. The lender is faced with a dilemma that it does not want to make customers homeless, but at the same time knows that mortgage losses can be significant or even fatal to the organisation. Most would accept that the lender has to act eventually, but few people, if any, can predict when the market will improve, and even if it does, whether the market might improve further, suggesting that the lender should delay a sale still further.
In deciding when to sell, RST Bank plc has to pay due regard to the interests of not only the borrower but also other stakeholders, including those who own the bank and those who put up funds for the bank in the form of deposits.As the most recent credit crisis resulted in a deep and prolonged dip in the housing market, RST Bank plc was faced with the impossible problem of satisfying the conflicting demands of different stakeholders.
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