WIREDGOV

OFT consults on second charge lending guidance

OFFICE OF FAIR TRADING News Release (13/09) issued by COI News Distribution Service. 13 February 2009

The OFT today launched a consultation on draft guidance for businesses engaged in second charge lending.

Second charge loans, or 'homeowner loans', involve consumers with an existing mortgage taking out further personal borrowing secured against their home. Defaulting on a second charge loan can ultimately lead to repossession. Firms offering such loans must be licensed by the OFT.

The consultation follows a government review of arrears and repossession policies and practices in the second charge sector. The review did find examples of good practice within the market but, as with other lending markets, there is scope for spreading good practice more widely.

The draft guidance covers a range of issues such as customer care, advertising and selling techniques, contractual terms and conditions, and practices around managing arrears or defaults. It sets out the standards of behaviour that the OFT expects from those businesses engaged in second charge lending.

The guidance is designed to complement existing OFT guidance for lenders. Responses to the consultation on this guidance will also be taken into account as part of the wider irresponsible lending project being undertaken by the OFT. Guidance on irresponsible lending is to be published in autumn 2009.

The deadline for responding to the consultation is 8th May.

NOTES
1. The consultation can be found on the OFT's website at http://www.oft.gov.uk/advice_and_resources/resource_base/consultations/current/second-charge

2. The Government announced the OFT's intention to issue guidance in the 2008 Pre-Budget Report (http://www.hm-treasury.gov.uk/d/pbr08_completereport_1721.pdf)

3. Defaulting on a second charge loan (or other subsequent secured loan) can ultimately lead to repossession and if there is a shortfall in funds, the debtor can still be left with a debt following loss of their property.

4. The Financial Services Authority (FSA) regulates first charge mortgages.

5. Many of the large lenders in the sector are members of the Finance and Leasing Association (FLA) which has recently published Good Practice Guidelines for Second Charge Mortgages setting out standards which go over and above those required by statute. The OFT considers these guidelines to be a welcome step in the right direction.

6. The Consumer Credit Act 1974 (the Act) requires businesses that offer goods or services on credit and/or are involved in activities relating to credit or hire to be licensed by the OFT. Following implementation of the OFT's new powers under the Consumer Credit Act 2006 on 6 April 2008, businesses could also have specific 'requirements' imposed on them by the OFT. If such a requirement was not complied with, the business concerned could be subject to a financial penalty of up to £50,000. The OFT can also refuse or revoke a licence if it decides that a trader is not fit to hold one. The OFT can take into account any circumstances which appear to be relevant when considering the fitness of an applicant or licensee, including evidence that the company has contravened guidance published by the OFT.

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