Banks turning unsecured loans into secured ones
The OFT has slapped the wrists of RBS and NatWest for being too keen on using charging orders, which turn unsecured debts into secured ones. And that can put your home at risk.
Most articles you read about unsecured loans and credit cards state a glaring falsehood – that your property is safe if you're unable to pay your bills.
A timely piece of news has once again made clear just how wrong that is.
The Office of Fair Trading has taken firm steps against NatWest and Royal Bank of Scotland. By doing so, it has revealed the harsh reality that lenders can turn unsecured loans into secured ones with ease.
It's dead easy to do
Lenders can convert unsecured debts – such as from unsecured loans and credit cards – into secured ones if you fall behind on repayments. It can do this by applying to the court for a “charging order”. The court has no discretion to refuse this request so long as it is made without errors.
I interviewed a debt collector some years ago who said that charging orders aren't issued willy-nilly or even as a matter of routine, but they are a tool that is used frequently and without qualms by some lenders and debt collectors.
You aren't always given a chance
On top of that, some lenders are applying for charging orders before they even give debtors with temporary problems a proper chance to turn their finances around. This is what the Office of Fair Trading (OFT) concluded about Royal Bank of Scotland and its subsidiary NatWest.
Specifically, the consumer and competition authority found that the banks did not consider customers' personal circumstances, such as their efforts to repay debts using a debt-repayment plan or other method, and they were imposing charging orders on small debts, sometimes less than £5,000.
The OFT has imposed requirements on the banks to consider:
- the efforts of the customer to repay debt
- the size of the debt
- the personal and financial circumstances of the debtor (such as their assets)
- the length of time the money has been owed
- whether it is reasonable to take alternative steps to recover the money.
David Fisher, OFT Director of Consumer Credit, said: “Where we consider the use of charging orders to be unfair or oppressive we will take action to protect consumers.”
Usually, you can still keep your home
The good news is that a charging order just gives the lender a right to its share of your property when you sell your home; it doesn't force you to sell your home before you choose to.
However, after getting a charging order on a credit card debt or unsecured loan, a lender can apply to the court for a forced sale in exactly the same way that your mortgage lender or secured loan provider could.
The court is far less willing to grant orders that force a sale and the judge has discretion to reject these applications. If you have just £5,000 of credit card debt, for example, but a property worth £150,000, the judge is highly unlikely to agree that you should be forced to sell your property. He or she will also take your personal and family circumstances into account, which means not kicking children out onto the streets.
What to do if you're treated unfairly
If you think a lender or debt collector has treated you unfairly, perhaps by getting a charging order or threatening you with one, you can complain to the Financial Ombudsman Service. This free service can force banks to compensate you. Read Financial Ombudsman Service: how to complain to the FOS.
More from Lovemoney:
Secured loans: pros and cons
Where to get free debt advice
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Tip one, spread credit card debt around cards from different banking groups. Tip two, contact early if in difficulty in meeting payments and try to get a voluntary payment plan set up using standing order. Tip three do not default on current bank or building society credit cards. Tip four use a free service such as by CCCS at www.stepchange.org for advice and help. Tip five, avoid getting card debts high enough to be a significant proportion of any equity in property owned. Do NOT fund a shaky business by running up large debts with any one banking group. If any lenders try to get a charging order you have two defences. a) if any lender does not disclose all your debts including with other companies b) If a charging order would give one company an advantage over other lenders. Obviously if you've spread card debts over several different company groups, it is very difficult for any one of these to get a charging order on their debt. Make some fixed monthly payment each and every month on each debt. Try to negotiate charges and interest being stopped if you genuinely can't afford these. Provided you act reasonably in this way, it is unlikely that a CCJ will be put into effect, and unlikely though not impossible for a charging order to be made on your home or other property owned. You can in any case appeal if a charging order is made, on the grounds of personal/family hardship - provided you can support this. With budgets, if you are married or living with someone, your debt is yours alone as long as you are around, and any necessary expenses and priority payments can be calculated pro-rata based on your and their income. It is sufficient in claiming financial hardship that your share of essential expenses leaves you with insufficient to meet card or bank monthly minimum payments. You cannot claim on the basis of future vehicle replacement, future home improvements or foreign holidays! You can include life cover (not endowment investments) as an essential expense, therefore for your family take out enough life insurance to cover at least 2/5 of your card/bank borrowing debts plus funeral costs which should be enough for the debts to be 'settled' on a negotiated basis if you should pass on. If you follow this advice to the letter, you will probably avoid charging orders, though failing to meet mortgage payments is entirely another matter.
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24 January 2013