Could a borrower challenge mortgage rates in a variable rate contract as unfairly high?

[ClubMan]

No!!!

Why not?
While it's unlikely that any lender would charge, say, 15% right now, I'm not aware of anything to stop them (other than fixed rate and tracker loan agreements).

Mortgage Interest Rates

Mortgage Interest Rates Dáil Éireann Debate, Tuesday - 22 February 2022

www.oireachtas.ie

The price lenders charge for their loans is a commercial matter for individual lenders. As Minister for Finance I cannot determine the lending policies of individual banks including the interest rates they charge for loans including mortgages.

 

[MrEarl]

To my knowledge, most or all variable rate loan agreements (with the obvious exception of trackers) place absolutely no restrictions on when and by how much the lender can change the interest rate payable. As I mentioned before, I helped someone to take a case against BOI to the Ombudsman about 10 years ago that this constituted an unfair contract in breach of the relevant EU law but, unfortunately, they rejected it.

I'd think that the Ombudsman's office would have a far more sympathetic view now, then it did a decade, or more, ago.

 

[Brendan Burgess]

I'd think that the Ombudsman's office would have a far more sympathetic view now, then it did a decade, or more, ago.

Not sure his view would change on this issue. If you sign a contract for a variable rate that says that the lender may vary the rate at their discretion, I don't think that the Ombudsman could interfere with that.

You would have to have a better argument than "It's very unfair" or "it's terrible". For example, if your original contract with ptsb or Danske tied your rate into one of their rates.

Brendan

 

[ClubMan]

You would have to have a better argument than "It's very unfair" or "it's terrible".

I disagree, and, in any case, there is EU legislation on unfair contracts skewed in favour of one party and at the expense of the other.

Consumer rights in the EU

When buying products or services from a trader based in the EU/EEA, you have strong protections under consumer law. Find out more about these rights and what to do if things go wrong.

www.citizensinformation.ie

Unfair Terms in Consumer Contracts Directive

When you enter into a contract with a seller you are protected under the EU Directive on unfair terms in consumer contracts 93/13/EEC. The Directive states that the standard terms in a contract between you and the seller have to be fair and in plain, understandable language.

If there are any doubts about a contract term, the term should be interpreted in your favour. Contract terms are unfair if they create a significant imbalance between your rights and obligations as a consumer and the rights and obligations of the seller or service supplier. In other words, a term can be unfair if it puts you at a disadvantage.

Signing a contract cannot abrogate statutory rights. My argument was that the BoI variable rate clause in which they reserved the right to change the rate at any time and by any amount fell foul of that legislation. The Ombudsman disagreed. I still think that they were wrong.

But perhaps this is a topic for another thread?

 

[Itchy]

Not sure his view would change on this issue. If you sign a contract for a variable rate that says that the lender may vary the rate at their discretion, I don't think that the Ombudsman could interfere with that.

I'm not sure that will be the case. The pace and size of interest rate rises shows that variable rate contracts are emerging as a financial stability issue. Spain have today agreed to provide state support to lower variable rates. " Most variable mortgages are tied to 12-month Euribor... plus a margin based on the borrower’s circumstances. But loan payments are generally only adjusted once a year." And those terms seem more restrictive than the vultures variable rate "discretion".

In Poland infamously, mortgages that were issued in Swiss Francs were reviewed as payments became unsustainable due to currency/political developments. Those that had paid back the loan in domestic currency were considered to have paid back the debt.

Unrestrained variable rate policies may not be that sustainable as they stand.

 

[NoRegretsCoyote]

Signing a contract cannot abrogate statutory rights. My argument was that the BoI variable rate clause in which they reserved the right to change the rate at any time and by any amount fell foul of that legislation. The Ombudsman disagreed. I still think that they were wrong.

IANAL but this seems a gray area. The relevant SI says that:

(2) For the purpose of these Regulations a contractual term shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer, taking into account the nature of the goods or services for which the contract was concluded and all circumstances attending the conclusion of the contract and all other terms of the contract or of another contract on which it is dependent.

But it goes on to say that a lender can alter the rate of interest once it is notified:

( b ) Subparagraph (j) is without hindrance to terms under which a supplier of financial services reserves the right to alter the rate of interest payable by the consumer or due to the latter, or the amount of other charges for financial services without notice where there is a valid reason, provided that the supplier is required to inform the other contracting party or parties thereof at the earliest opportunity and that the latter are free to dissolve the contract immediately.

A borrower could argue that there is an imbalance as the lender can increase the interest rate at will and the borrower has no option to switch. A lender could bring spreadsheets and say that the rate reflects its funding costs and is adjusted for the risk associated with the borrower.

I can't see anything in the Central Bank Consumer Protection Code on this matter either.

 

[NoRegretsCoyote]

I found some case law where the High Court seems to have ruled in 2018 that an interest rate applied cannot be considered unfair to the consumer if "the price is linked to fluctuations in a stock exchange quotation or index or a financial market rate that the seller or supplier does not control" as per the 1995 SI.

I think a plaintiff would have to prove that a lender was increasing the variable rate well over and above the change latter's own funding costs.

 

[time to plan]

Why not?
While it's unlikely that any lender would charge, say, 15% right now, I'm not aware of anything to stop them (other than fixed rate and tracker loan agreements).

Mortgage Interest Rates

Mortgage Interest Rates Dáil Éireann Debate, Tuesday - 22 February 2022

www.oireachtas.ie

Is there any regulatory barrier? Could they start charging 50%? Or 200%? There must be some regulation about unfair or grossly unfair practice. Does anyone know?

 

[ClubMan]

Is there any regulatory barrier?

I don't think so. Unless the 48% limit mentioned here also applies to mortgage lenders?

Consumer Credit (Amendment) Act 2022 will restrict rates charged by high cost credit providers - Fleming

www.gov.ie

 

[time to plan]

I don't think so. Unless the 48% limit mentioned here also applies to mortgage lenders?

Consumer Credit (Amendment) Act 2022 will restrict rates charged by high cost credit providers - Fleming

www.gov.ie

Then what is stop a vulture fund buying a mortgage book from Pepper and increasing the interest rate to 48%, 200% etc? There must be something.

 

[NoRegretsCoyote]

Then what is stop a vulture fund buying a mortgage book from Pepper and increasing the interest rate to 48%, 200% etc?

They would have to prove that it is linked to their funding costs.

 

[ClubMan]

They would have to prove that it is linked to their funding costs.

I don't think that that single case necessarily obligates them to do so?

 

[NoRegretsCoyote]

I don't think that that single case necessarily obligates them to do so?

What I mean is that if a lender started charging 20% tomorrow interest and was challenged they wouldn't be able to prove that it was linked to their funding costs.

 

[Itchy]

In terms of people in financial difficulty on an agreed payment plan, filling out the SFS and reaching an agreement on a payment in accordance with their means, PIA etc. Surely it's a stretch to move the interest payment in line with interest rates, which is the majority of people who find themselves with Pepper? They could extend the term but don't. Debt servicing capacity does not change with interest rates.

They would have to prove that it is linked to their funding costs.

Didn't seem to apply when funding costs were ultra low? When reference rates were negative, they were floored at zero for the retail market. Funding costs for loans acquired at 30% of the nominal would have a case if that was the scenario.

Mortgage pricing was anomalous over the last few years (up until say 12/18 months ago) with variable rates far exceeding fixed rates on offer, despite negative rates.

 

[Sarenco]

I disagree, and, in any case, there is EU legislation on unfair contracts skewed in favour of one party and at the expense of the other.

The Ombudsman has no jurisdiction under that legislation.

In theory, the Director of Consumer Affairs could get involved if a lender has no valid reason for a variable rate increase.

But I wouldn’t hold my breath…

 

[Brendan Burgess]

The Ombudsman has no jurisdiction under that legislation.

Hi Sarenco

If someone took a complaint on this issue to the Ombudsman, surely he would consider all relevant legislation.

In any event, he is not bound by legislation

Section 12
(11) Subject to this Act, the Ombudsman, when dealing with a particular complaint, shall act in an informal manner and according to equity, good conscience and the substantial merits of the complaint without undue regard to technicality or legal form.

 

[Sarenco]

…he is not bound by legislation

That’s really the point.

The Ombudsman has no role in the enforcement of the Unfair Terms in Consumer Contracts Directive - that’s the role of the Director of Consumer Affairs.

 

[Brendan Burgess]

Hi Sarenco

Is the following correct?

1) If the (completely useless) Director of Consumer Affairs felt that a particular contract was unfair, he/she (I don't even know who it is, they are so prominent.) could presumably issue a directive.

2) If Johnny feels that in his case that the term was unfair, he could complain to the Ombudsman. And the Ombudsman might well refer to European legislation in their decision.

Brendan

 

[Sarenco]

If Johnny feels that in his case that the term was unfair, he could complain to the Ombudsman

Well, it would make more sense for Johnny to make a complaint to the CCPC in that case.

Again, it's the Director of Consumer Affairs, not the Ombudsman, that has jurisdiction to enforce the Unfair Terms in Consumer Contracts Directive in Ireland.

 

[NoRegretsCoyote]

There is no harm in trying to get the CCPC to act on this. You would have to be an impacted customer however. I don't think there is much chance but it's the cost of a stamp.

Here is a sample letter if anyone wants to try. You would need to annex copies of the correspondence from Pepper as well. Letters are better than emails in my experience.


Director of Consumer Affairs
Competition and Consumer Protection Commission
Bloom House
Railway Street
Dublin 1
D01 C576

Dear Director,

I am a mortgage holder with Pepper Finance Corporation Ireland. Since [Date 1] I have been charged a variable rate of 4.5% and I have made agreed monthly payments in full. Pepper wrote to me on [Date 2] to increase it to [x%] and on [Date 2] to increase it again to [y%]. This is causing me actual loss as my mortgage payments have increased from [€A] to [€B] per month.

I believe that this contravenes my consumer rights under S.I. No. 27/1995 - European Communities (Unfair Terms in Consumer Contracts) Regulations, 1995, specifically section 3(2) below:

For the purpose of these Regulations a contractual term shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer, taking into account the nature of the goods or services for which the contract was concluded and all circumstances attending the conclusion of the contract and all other terms of the contract or of another contract on which it is dependent.

The increase in rates by [Z%] creates a significant imbalance to my detriment. I do not have an option to switch lender or choose a different rate. The loan was sold my [previous lender] to Pepper Finance Corporation Ireland and the latter offers no fixed rates unlike my previous lender. I do not believe that Pepper Finance Corporation Ireland qualifies for the exception under Schedule 3, Section 2(c) of the aforementioned SI regarding a "financial instruments and other products or services where the price is linked to fluctuations....financial market rate that the seller or supplier does not control". To my knowledge Pepper Finance Corporation Ireland's own costs have not increased by this amount, nor has it made a clear claim in this regards. In sum, this additional cost imposed on me amounts to an abuse of a contractual term which is unfair to me as a consumer. There are several thousand other customers of Pepper Finance Corporation Ireland who are likely in the same position as me.

I urge you to make use of your legal powers to under Section 8 of the aforementioned SI to apply to the High Court to prohibit Pepper Finance Corporation Ireland from making use of this unfair contractual term.

I look forward to your response.

Sincerely