Jeff Salway: Words not enough to save borrowers from exploitative lenders

LENDERS who view borrowers in financial hardship as an easy target for profitable exploitation must hope the City watchdog's bark remains worse than its bite.

The Financial Services Authority (FSA) wants to introduce rules preventing lenders from penalising borrowers in arrears if they have reached some form of repayment arrangement, among other measures to give those in arrears greater protection.

The proposals were a long time coming, but the regulator has a track record of procrastination and inaction when it comes to arrears. It first expressed concerns over the charges back in 2007, yet the fees remain largely the same and as arrears and repossessions have soared, it has become a useful source of revenue for lenders. Only two firms have been fined so far, even though the FSA has long acknowledged that charges in the "specialist" mortgage market in particular are "disproportionate".

Last October it fined GMAC RFC 2.8 million for levying excessive fees on borrowers in arrears, but refused to reveal the names of the other firms it is taking enforcement action against over arrears charges. The GMAC RFC penalties were described by the FSA as "excessive" and not reflective of administration costs, yet it remains unclear where the regulator is drawing the line.

According to the FSA, lenders have continued to penalise borrowers for falling behind on their repayments even when they have reached an agreement to repay what is owed. GMAC is the biggest culprit, but far from alone. Santander charges 40 a month for arrears of one or more monthly instalments, while NatWest has a 25 fee and Bradford & Bingley 30 a month, according to Moneysupermarket.

Lloyds and Cheltenham & Gloucester charge just 10 a month on one month of arrears, but that climbs to 206 for arrears three months and over. However, it's important to note that not all lenders are guilty, and the biggest charges are in the specialist mortgage sector. HSBC, for instance, does not charge borrowers in arrears or for "advice".

The real kick in the teeth for struggling borrowers, however, is the charges for so-called debt counselling or "arrears services", which in most cases means little more than a visit from a debt collector. For this "assistance" Santander charges up to 79.90 a month, Halifax 100 and Lloyds TSB and Cheltenham & Gloucester 94.

The key message from the FSA on Tuesday was that borrowers in debt do not constitute a money-making opportunity. There were plenty of dissenting voices yesterday, however. One popular school of thought is that people who have fallen behind on their mortgages should suffer the consequences and that "sensible" borrowers will pay for letting them off the hook.

That is to imply that if you have fallen behind on your repayments because of events out of your control – job loss or illness, for example – lenders are entitled to rub salt in the wound by making it even harder to meet your repayment obligations. Even if you have followed the correct procedure and contacted your lender to arrange a repayment schedule, the lender, so the argument goes, has grounds to clobber you with charges that bear no relation to the costs it incurs due to the missed repayments and associated administration.

That is not only ludicrous, but gives lenders far too much credit. While providers are entitled to recover administration costs, charging borrowers 35 for arrears letters is exploitation, as is dressing up a debt collection visit as "counselling" and charging a further 100. Yet while the "advice" provided by lenders covers only the mortgage repayment, free debt advice is available from a number of sources, including Citizens Advice and the Consumer Credit Counselling Service.

As City Minister Lord Myners pointed out last year, the manner in which lenders handle arrears cases is not only excessive, but short-sighted on the part of lenders. If lenders were committed to treating customers fairly, they would ensure that customers in financial difficulties were given access to free advice that would address their wider debt issues.

By all means recoup the costs of administration and charge a nominal fee to deter borrowers from slipping into avoidable arrears. But do not pretend that excessive arrears charges are anything but exploitation of vulnerable homeowners.