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ombudsman news issue 88 [PDF format]

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ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.

ombudsman news

issue 88

August/September 2010

mortgage underfunding

Our technical advice desk has recently seen a rise in the number of calls about our approach to mortgage underfunding – where a lender has calculated mortgage payments incorrectly.

This is not a new area for us. Each year we deal with a large number of disputes involving situations where this has happened. In these cases, the consumer usually complains that they had been paying the amount quoted by the lender but were then shocked to find that the outstanding mortgage balance was more than they had originally been told.

Our approach to compensation in these cases is not new. Almost ten years ago, in issue 3 of ombudsman news, we set out how we deal with cases involving mortgage underfunding. Our long-standing approach also forms the basis of the information about mortgage underfunding that we have published as part of our online technical resource.

Given the recent interest in how we deal with mortgage underfunding complaints, we have summarised that technical note for this issue of ombudsman news.

overview

Mortgage-underfunding problems can arise where a mortgage lender tells a consumer to make monthly repayments that are too low. This can happen for a number of reasons, most commonly where the lender:

quotes an interest-only payment in error;
from the start, calculates the repayment over a longer term than the consumer wants – for example, the consumer asks for a 15-year mortgage, but the lender sets it up over 25 years;
lengthens the mortgage term in error, or without the consumer’s knowledge (known as ‘term extension’) – for example, the consumer asks for a new loan to be set up over the remaining term of the old loan, but the lender sets it up over a new 25-year term;
makes a typing error in the monthly repayment figure quoted to the consumer; or
forgets to include part of the borrowing when calculating the monthly repayment.

our approach

To decide what redress is appropriate, one of the issues we will consider is whether the lender is entirely to blame. This will involve our deciding whether the consumer should have known that they were not paying enough.

This largely depends on what information the consumer was given by the lender. But we also look at the consumer’s individual experience and financial knowledge.

We take into account a range of considerations including:

what the lender’s mortgage offer said the monthly repayments would be;
whether that offer tallied with any mortgage illustrations given previously to the consumer;
the information provided in any annual statements sent to the borrower (for example – whether the balance was shown as going down, what the mortgage term was shown as, and whether the payments were described as ‘interest-only’);
information contained in letters about interest-rate changes;
whether the consumer queried the requested payment, but was given a misleading reassurance by the lender; and
the extent to which the consumer should have been reasonably capable of inferring, from the overall information they were given, that they were not paying enough.

In cases where the monthly repayment was too low because an error by the lender incorrectly extended the term of the mortgage, we will generally decide that the lender is entirely to blame.

Where the term of the mortgage was extended as a result of a misunderstanding between the lender and the consumer, we will decide if the lender is entirely to blame by considering whether:

the layout and wording of the mortgage application-form helped the consumer to understand what options were available, and made clear what terms were required for the further mortgage advance;
the consumer made it clear to the lender and/or an intermediary what arrangements they wanted in relation to the term of the mortgage; and
any general policy that the lender had, linking the terms of the original loan and the further advance, was made clear to the consumer at the time they applied for the further advance.

redress if the lender is entirely to blame

A typical case where we would be likely to decide that the lender is entirely to blame is where:

the mortgage offer itself quoted an incorrect lower monthly repayment;
the consumer paid that amount in good faith, believing it to be correct; and
the consumer raised the matter with the lender as soon as the discrepancy became obvious.

In cases like this, our usual approach is to tell the lender to write-off the capital shortfall that has built up, to the date the mistake was sorted out. We will not usually deduct from the shortfall the notional past ‘savings’ that the borrower made as a result of making
lower payments.

The idea of compensating the consumer in this type of case is to make up for the opportunity they have lost to make the higher repayments. By the time the problem is recognised, the consumer will normally have spent (as part of their normal expenditure) the ‘savings’ they had been making each month but did not know about.

We will generally assume that the consumer would have made the correct (higher) repayments, if they had been asked to do so.

Exceptionally we might deduct notional past 'savings' (without interest) from the capital shortfall:

to the extent the lender can show that the consumer has kept the past ‘savings’ as identifiable and ‘readily-realisable’ assets; and
unless the consumer can show that it would be unreasonable to do so in the particular circumstances.

Where appropriate, we will also award compensation for past distress and inconvenience – but only so far as it exceeds any notional past ‘savings’ we have disregarded. We will not usually award compensation for the future inconvenience of having to make increased payments.

Sometimes, unknown to the consumer, the underfunding has lengthened the mortgage term. Occasionally, this is counterbalanced by capital payments made by the consumer (perhaps from an inheritance or a redundancy payment) or by any regular overpayments they made.

The consumer will have made these payments with the intention of shortening the original mortgage term. So we would not generally allow the amount the consumer paid in this way to reduce the normal calculation of compensation. Instead, we would be likely to ‘strip out’ the effect of the capital repayment or overpayments when calculating loss, by ‘modelling’ the mortgage account to ignore any extra payments made.

exceptional cases

Exceptionally we may modify this approach where we consider it reasonable in the circumstances of the particular case. For example:

if the consumer is near or beyond retirement and cannot afford the future increased payments, then even if the whole shortfall to date is written-off, we might award some compensation in relation to the future additional payments – or require part of the loan to be interest-free;
if the consumer would not have taken out the mortgage at all if they had been told the correct repayment figure, we might compensate them on the basis of putting them in the position they would have been in, if they had not been misled;
if the consumer ran up arrears by failing to pay all of the (incorrect) lower repayments – so showing that they would not have made the correct higher payments anyway – then we are likely to reduce compensation accordingly. It is likely that we would reduce compensation to an award for distress and inconvenience only – and this is likely to be no more than £250. In reducing compensation, we will consider evidence as to whether the arrears were increasing, staying the same or decreasing – and whether they were for the whole or part of the relevant period.

There is more information about our approach to compensation for distress and inconvenience in our online technical resource.

redress if the lender is not entirely to blame

Typical cases where the consumer would have to accept part of the blame, and where we would reduce the compensation proportionately, are where:

the mortgage offer quoted an incorrect monthly repayment; the consumer initially paid that amount in good faith, believing it to be correct; but they later discovered the discrepancy and kept quiet;
the mortgage offer quoted a correct monthly repayment; but the lender collected the wrong amount by direct debit; and the consumer kept quiet about the discrepancy in circumstances where they must have realised something was wrong;
the lender provided, and discussed with the consumer, a mortgage illustration that quoted the correct monthly repayment; the subsequent mortgage offer quoted an incorrect monthly repayment; and the discrepancy was such that the consumer must have realised something was wrong;
the lender mistakenly set up a repayment mortgage as an interest-only mortgage; but we are satisfied that the consumer must have known, from the documents sent to them, that this is what had happened.

Once the consumer discovers the problem but keeps quiet, it would not be fair to disregard any notional past ‘savings’ which subsequently built up.

examples

The following examples are based on a case where:

The loan was intended to be a £50,000 repayment mortgage over a 25-year term.
The monthly repayments paid the interest only, because of a mistake by the lender.
The mistake was discovered after 5 years, with 20 years of the term left.
At that stage, the mortgage debt was £4,000 higher than it should have been.
Notional past ‘savings’ were £3,500.
We consider that £250-worth of inconvenience was caused to the consumer.

Usually we would not deduct any of the notional past savings from the capital shortfall.

We would require the lender to write-off the whole capital shortfall of £4,000.
We would not award anything for inconvenience, because the disregarded notional past ‘savings’ of £3,500 exceed the £250 we would otherwise have awarded.

Exceptionally, if the lender showed that £1,000 of the past ‘savings’ formed an identifiable and ‘readily-realisable’ part of the consumer’s current assets:

We would deduct £1,000 of the notional past ‘savings’ from the capital shortfall.
We would require the lender to write-off the remaining £3,000 of the capital shortfall.
We would not award anything for inconvenience, because the disregarded notional past ‘savings’ of £2,500 exceed the £250 we would otherwise have awarded.

Exceptionally, if the lender showed that all the past savings formed an identifiable and ‘readily-realisable’ part of the borrower’s current assets:

We would deduct all of the £3,500 notional past savings from the capital shortfall.
We would require the lender to write off the remaining £500 of the capital shortfall.

We would also award £250 for inconvenience.