Families face losing homes over debts of £600, warns watchdog

Share this article

LENDERS have been accused of threatening customers with potentially losing their homes over debts as low as £600.

The Office of Fair Trading (OFT) yesterday raised concerns over the way in which some banks are using an obscure court order to have customer debts secured against their property.

It said charging orders and inhibition orders, the Scottish equivalent, which effectively turn an unsecured debt such as a credit card into a secured one, were a legitimate way for creditors to recoup unpaid debts.

However, Alliance & Leicester Personal Finance, American Express Services Europe, HFC Bank (part of HSBC) and Welcome Financial Services have been singled out by the OFT after an investigation found they had used the orders inappropriately.

Ray Watson, director of consumer credit at the OFT, said: "Our investigation uncovered instances of charging orders being used to secure debts of less than 600. Lenders are entitled to use charging orders but must do so proportionately."

The OFT's investigation identified cases where the customer's circumstances had not been properly considered before the order was put in place and where creditors had not carried out adequate checks when making the original decision to lend.

The watchdog said that some lenders had charged debtors when they had referred their cases to a debt collection agency. In a minority of cases debtors had been sent oppressive and misleading correspondence, it found.

The four companies had co-operated with the investigation and made changes to address the problems identified, said the OFT, which added that it was working to ensure the whole banking industry used charging or inhibition orders and other debt enforcement tools responsibly.

Andrew Hagger, head of communications at moneynet.co.uk, said borrowers should be aware that even an unsecured loan could result in creditors securing the loan on their property if they fail to repay it.

He said: "These orders don't often make the news and there is a case for them being used where unsecured debts are substantial and there is equity in the borrower's property. However, in some cases it seems they are being used to intimidate those who are unable to pay."

Sue Edwards, head of consumer policy at Citizens Advice, welcomed the news, saying it was concerned at the use of charging orders to intimidate vulnerable debtors into paying more than they can afford, or to force the sale of a property to recover an often small unsecured debt by enforcing charging orders through an order for sale.

"Placing requirements on companies is a good start, but the current law on charging orders urgently needs reviewing and appropriate protection for people put in place," she said.Debtors beware:

Charging orders allow creditors to claim any money left after the sale of a debtor's home once priority debts, such as the mortgage, have been covered.

The Scottish equivalent is an inhibition order, with the difference being that the order is on the debtor and not the property. In other words, a lender can apply to a court for an inhibition order to prevent the debtor selling it without settling their debt.

While on a charging order the creditor can obtain a second order forcing the debtor to sell their home, an inhibition order cannot force a sale. But if a debtor sells voluntarily, a creditor with an inhibition order will get their share of the equity, once the priority debts are cleared.