A recent case described as ‘important’ by legal professionals could create problems for mortgage lenders and brokers in dealing with PPI complaints.
In a recent County Court case in Manchester, borrowers pursued a claim against the subprime lender Nemo Personal Finance, under Section 140A of the Consumer Credit Act.
Section 140A of the Consumer Credit Act empowers the Court to make such orders as it determines appropriate where there is an unfair relationship between creditor and debtor.
In this case, the borrowers sought redress entirely from the lender, as the mortgage broker involved, Loan Options, has gone into administration.
One of the borrowers claimed that the mortgage broker “forced” an uncompetitive PPI policy upon her, and made her feel that the taking of PPI was a condition of receiving the loan.
The borrowers also sought declaration that the lender had procured a breach by the broker of its fiduciary duty by paying undisclosed commission.
Although the case was decided at County Court level and therefore is not binding on other courts, it has been said that there is “little doubt” that it will be produced by debtors, PPI claimants and claims management companies in support of claims.
In this particular case the PPI premium was £15,468.75, the premium being funded from a loan repayable over a 20 year term.
The total cost of the PPI with interest was £32,436, with the loan providing life cover for both of the debtors and sickness and unemployment benefit for the first named debtor. The cover was limited for a period of 5 years only and provided cover for 12 monthly payments, equating to £8,000 in any one claim. A 50% refund of the premium was available at the end of the policy if no claim was made under it.
In respect of the loan advance, the brokers received a commission of £9,982.50 and a brokers’ fee of £2,000. Half of the PPI premium was received as commission by lender and broker.
The Judge decided on the facts that the policy was unfair to the claimants.
His Honour Judge Platts took account of the fact that the commission received increased significantly by inclusion of the premium for PPI and that although payment of commission was known to borrowers, the precise amount was not.
He said: “If the debtor knew the amounts involved she would have had a clear picture from which to make an informed decision as to whether or not what was being offered to her was in her best interests.”
It was also acknowledged that whilst the lender could not be held liable for anything said or done by the broker, the Judge still found that the claimants were led to understand that the PPI had to be taken as a condition of the loan (though the documents stated otherwise) taking the view that the debtor was an “unsophisticated” borrower.
“It seems to me if the consumer is paying £15,000 for a policy of insurance he is entitled to know in the interest of fairness that less than one half is actually going to pay for the policy and more than half is going to be paid in commission to the broker and the lender who is effectively selling the product to the consumer,” the Judge continued.
The Court found that the amount involved gave incentive to the broker to sell the product and that although the primary duty of disclosure is on the broker this does not remove the necessity from the lender to ensure that the broker has discharged his duty.
The exact redress due to the borrower is yet to be quantified.
Jonathan Newman, legal expert and partner at the solicitor firm Brightstone Law, said that the case was significant as it was one of the first known cases on unfair credit relationships where PPI mis-sale has been used as the basis for the claim.
He said: “This outcome could affect a lot of brokers, and lenders also need to worry as under the relatively new Section 140A of the Consumer Credit Agreement the Courts have wide powers to give awards, compensate borrowers and redraw credit agreements.Section 140A applies to Consumer Credit Act loans and unregulated loans.
“What we can learn from this case is that the Courts are looking for complete transparency in the payment of commissions where borrowers are designated as “unsophisticated”. Here there was a “huge lacuna” of evidence. Better record keeping including recording of phone conversations, can be the difference between success and failiure in defending these claims..”
He added: “In this case the borrowers succeeded on the facts as the terms of the policy were deemed particularly unfair and expensive, In future cases where the terms are different, the disclosure clearer, and the broker available to provide better evidence as to what events took place at the point of sale the outcome may just be different.”
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+Tim Capper reports on Financial Mis-Selling for Maple Leaf Financial. Our aim is to ensure you get honest advice and proper guidance to ensure a suitable recommendation can be made to pursue a financial claim
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