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

[Dazzler123]

Where do you get that idea from? If mortgage interest rates where excluded from the outset from being assessed as unfair, then why do terms which have the object and effect of being unfair under schedule 3 of S.I. 27/1995 (j) and (l) exist?

Look at schedule 3 (2) b). It specifically limits j) and l) in the context of interest rates set by mortgage providers.

The provision of interest is NOT a main term of a mortgage loan contract as some contributors on this site have suggested (indeed some Irish High Court Judges have also erred in this regard). This matter was settled in the Supreme Court legal case Pepper v Cannon (para 129 refers), where Justice O’Malley outlined what the main terms of a mortgage loan agreement are: the obligation to repay the loan and to provide security for it, and the lender’s right to take possession of the security in the event that the loan is not repaid. Price variation clauses are not part of the main terms of a mortgage loan agreement.

The obligation to pay interest has to be a main term. How does consideration for the contract pass from borrower to bank on an interest free loan? Where there is only one clause dealing with interest rates, it must be considered as a main term.

The supreme court sidestepped that issue as it relied on the exception for interest rates for mortgage providers. The SC list i dont think could be viewed as an exhaustive list of main terms, particularly as you say, the high court has held that interest rate clauses are main terms. The SC decision in cannon does not overturn that.

 

[CarrotStick]

Look at schedule 3 (2) b). It specifically limits j) and l) in the context of interest rates set by mortgage providers.



The obligation to pay interest has to be a main term. How does consideration for the contract pass from borrower to bank on an interest free loan? Where there is only one clause dealing with interest rates, it must be considered as a main term.

The supreme court sidestepped that issue as it relied on the exception for interest rates for mortgage providers. The SC list i dont think could be viewed as an exhaustive list of main terms, particularly as you say, the high court has held that interest rate clauses are main terms. The SC decision in cannon does not overturn that.

Firstly, there has to be a valid reason for such an interest rate rise, a provider cannot raise interest rates capriciously, that is what this thread is about.

Read the ECJ determination in C-125/18, if mortgage interest rates were excluded from the outset from being assessed as being unfair, then how did the grand chamber of the ECJ hear this case and make an adjudication on same. I rest my case.

Finally, the Supreme Court of Ireland is the court of last instance in this jurisdiction, its decisions overturn all other courts decisions whether that be Circuit Court/ High Court/ or Court of Appeal decisions that deal with the same issue, (In this case what the main terms of a mortgage loan agreement are). I’m afraid this is how the system of law works in Ireland. Case precedent and all that. Somewhat inconvenient for many, but that is how it is.

 

[CarrotStick]

Look at schedule 3 (2) b). It specifically limits j) and l) in the context of interest rates set by mortgage providers.



The obligation to pay interest has to be a main term. How does consideration for the contract pass from borrower to bank on an interest free loan? Where there is only one clause dealing with interest rates, it must be considered as a main term.

The supreme court sidestepped that issue as it relied on the exception for interest rates for mortgage providers. The SC list i dont think could be viewed as an exhaustive list of main terms, particularly as you say, the high court has held that interest rate clauses are main terms. The SC decision in cannon does not overturn that.

Dazzler123, in the European Court of Justice legal case C 143/13

the Court ruled:

Article 4(2) of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts must be interpreted as meaning that ‘main subject-matter of the contract’ and ‘adequacy of the price and remuneration, on the one hand, as against the services or goods supplies in exchange, on the other’ do not, in principle, cover the types of terms in the credit agreements concluded between a professional and consumers such as those at issue in the main proceedings, which, on one hand, allow, under certain conditions, the lender unilaterally to alter the interest rate and, on the other hand, provide for a ‘risk charge’ applied by the lender.

so you see, the obligation to pay interest is not a main term of a contract and article 4(2) of the unfair terms directive does not always exclude interest rate clauses, especially clauses that allow the lender to unilaterally alter the interest rate. (Pepper springs to mind).

 

[Raging Bull]

Dazzler123, in the European Court of Justice legal case C 143/13

the Court ruled:

Article 4(2) of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts must be interpreted as meaning that ‘main subject-matter of the contract’ and ‘adequacy of the price and remuneration, on the one hand, as against the services or goods supplies in exchange, on the other’ do not, in principle, cover the types of terms in the credit agreements concluded between a professional and consumers such as those at issue in the main proceedings, which, on one hand, allow, under certain conditions, the lender unilaterally to alter the interest rate and, on the other hand, provide for a ‘risk charge’ applied by the lender.

so you see, the obligation to pay interest is not a main term of a contract and article 4(2) of the unfair terms directive does not always exclude interest rate clauses, especially clauses that allow the lender to unilaterally alter the interest rate. (Pepper springs to mind).

The crux of the issue is how the purchase of the loans was funded. I would imagine on a long term swaps contract basis which would have a fixed rate so there shouldn't be a huge rationale for rate increases so.

 

[Dazzler123]

Firstly, there has to be a valid reason for such an interest rate rise, a provider cannot raise interest rates capriciously, that is what this thread is about.

Yes, this is correct. My point is that the unfair terms legislation is not the best method to attack these interest rate increases.

Read the ECJ determination in C-125/18, if mortgage interest rates were excluded from the outset from being assessed as being unfair, then how did the grand chamber of the ECJ hear this case and make an adjudication on same. I rest my case.

There are a number of requirements of all contract terms set out in the directive, in that they be clear transparent etc and that is what this case relates to. Determination of a contractual term being unfair or not falls solely within the ambit of the national court.

Finally, the Supreme Court of Ireland is the court of last instance in this jurisdiction, its decisions overturn all other courts decisions whether that be Circuit Court/ High Court/ or Court of Appeal decisions that deal with the same issue, (In this case what the main terms of a mortgage loan agreement are). I’m afraid this is how the system of law works in Ireland. Case precedent and all that. Somewhat inconvenient for many, but that is how it is.

I am aware of the hierarchy of court jurisdictions in the country. The fact remains that the supreme court stated in paragraph 131 of the cannon judgment that the interest variation clause comes within the exemption of the annex to the directive , i.e. a financial services provider can vary the interest rates as long as theres a valid reason, they inform the customer asap and the customer can dissolve the contract. Case precedent and all that, etc...

There are 4 issues with using unfair terms to attack these interest rate increases:

1. The financial services exception for interest rates. An interest rate variation clause can be asseseed for unfairness if there is no valid reason for the increase. This is extremely difficult to prove. Even if you get over this hurdle and show in practise, there waa no valid reason, you must then show that the clause itself is unfair (not necessarily how it is implemented).

2. It is open to a financial services provider to argue that interest rates are a main term of the contract, particularly if there is no other term setting interest rates which is generally the case. The main thrust of a mortgage contract is a loan to be repaid with interest with real property as security for the loan. If its a main term of the contract, this is another exception against testing a clause for unfairness.

3. Even if you ultimately succeed, and the interest rate clause is struck down for unfairness, the bank will argue that the contract cannot subsist, itll be dissolved and they will call in the entire loan immediately. 99.99% of people cannot repay their mortgage in full immediately.

4. These vaguely worded clauses are standard within the industry. Success in striking these down would destroy banking in this country as all the banks use such clauses.

 

[NoRegretsCoyote]

1. The financial services exception for interest rates. An interest rate variation clause can be asseseed for unfairness if there is no valid reason for the increase. This is extremely difficult to prove. Even if you get over this hurdle and show in practise, there waa no valid reason, you must then show that the clause itself is unfair (not necessarily how it is implemented).

Having read the legislation, I am not convinced that a blanket exception for financial services from unfair contracts law exists .

2. It is open to a financial services provider to argue that interest rates are [not] a main term of the contract, particularly if there is no other term setting interest rates which is generally the case. The main thrust of a mortgage contract is a loan to be repaid with interest with real property as security for the loan. If its [not] a main term of the contract, this is another exception against testing a clause for unfairness.

I assume you meant to put a "not" in two places above. I don't see how in substance the language and practice setting the interest rate a borrower pays is not a main term of a contract. It's impossible to argue that it is not one of a loan's most important features.

3. Even if you ultimately succeed, and the interest rate clause is struck down for unfairness, the bank will argue that the contract cannot subsist, itll be dissolved and they will call in the entire loan immediately. 99.99% of people cannot repay their mortgage in full immediately.

How so? The contract could subsist with the removal of the unfair term. This reasoning is kind of circular anyway as one reason a mortgage holder could argue that the term is unfair in the firs place is because they are unable to refinance elsewhere and the lender has greater leverage.

4. These vaguely worded clauses are standard within the industry. Success in striking these down would destroy banking in this country as all the banks use such clauses.

Not in the slightest. Mortgage lending has survived the tracker redress issue for example.

 

[CarrotStick]

CBI Guidance
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Statement of reasons for an interest rate increase​

Where there is an increase in a variable interest rate, lenders will be required to include the reason for the rate increase in the notification provided to variable rate borrowers. The reason will tie in with and make specific reference to the lender’s variable rate policy statement.

Director of Consumer Protection, Bernard Sheridan, said: “Taking out a mortgage is one of the biggest decisions a consumer will make in their lives and it is essential that they can make this decision as part of a clear and transparent process that protects their interests. A primary concern for consumers, with a variable rate mortgage, is the rate that they will have to pay and how that may vary during the mortgage term. The measures we are introducing today will require lenders to be more transparent with borrowers about how they set their variable interest rates, including in the event of an increase. These measures will also improve the level of information required to be provided to borrowers on variable rates about other products, so they can consider their options.”

The Central Bank is amending the Consumer Protection Code 2012 (the Code) to add these enhanced transparency measures by publishing an Addendum to the Code. In order to allow firms sufficient time to develop and consumer test their plain English summary statements, as well as the systems changes needed to implement these measures, the measures set out in Part 1 of the Addendum will apply to regulated entities from 1 February 2017.

 

[NoRegretsCoyote]

Statement of reasons for an interest rate increase​

Where there is an increase in a variable interest rate, lenders will be required to include the reason for the rate increase in the notification provided to variable rate borrowers. The reason will tie in with and make specific reference to the lender’s variable rate policy statement.

I wasn't aware of this but this guidance was introduced in 2016 by the Central Bank.

Reading the Central Bank discussion paper it's very hard to make out the rationale or even the legal basis for its introduction. The obligations on lenders are very generic and easy to comply with, see my comments in square brackets ater

A regulated entity must ensure that the summary statement produced in accordance with Provision 4.28a:
i. clearly identifies the factors which may result in changes to the variable interest rate; [note factors plural, and only may result]
ii. clearly outlines the criteria and procedures applicable to the setting of the variable interest rate; [lender will consider factors, make a decision, write to borrowers]

One can only speculate, but the 2016 amendment to the the Code may have been an attempt to pre-empt some of the issues highlighted on this read relating to the Central Bank's powers and obligations under consumer protection law when it comes to variable rate charges.

 

[CarrotStick]

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

Brendan, Chitty on Contracts (Specific Contracts, 32nd Edition at para 38-255) has something to say on interest variation clauses, it states;

“if a price variation clause gives a supplier an unlimited discretion to vary the price (a term with can for this purpose be assumed to be potentially unfair given its lack of limitation nor justification), then it would not be binding on the consumer with the result that even a moderate variation of the price (itself not in the context apparently unfair) would not be effective against the consumer: the unfairness of the term makes it “not binding” on the consumer”

If the FSPO reads Chitty on Contracts maybe the FSPO might take a fresh look at such contractual provisions. The ECJ has ruled on the transparency requirements regarding interest rate variation clauses that with a view to complying with the transparency requirement of a contractual term setting a variable interest rate under a mortgage loan agreement, that term not only must be formally and grammatically intelligible but also enable an average consumer, who is reasonably well-informed and reasonably observant and circumspect, to be in a position to understand the specific functioning of the method used for calculating that rate and thus evaluate, on the basis of clear, intelligible criteria, the potentially significant economic consequences of such a term on his or her financial obligations.

A variable term that says a provider can vary its interest rates applicable to your loan or credit agreement at its discretion is simply unfair and fails the transparency test under the unfair terms directiv as articulated by the ECJ. So you are right, such terms are very unfair and also breach the EU’s unfair terms directive.

 

[CarrotStick]

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?

IANAL Hi there, I will post the quote from Chitty on Contracts again for your benefit.

“if a price variation clause gives a supplier an unlimited discretion to vary the price (a term with can for this purpose be assumed to be potentially unfair given its lack of limitation nor justification), then it would not be binding on the consumer with the result that even a moderate variation of the price (itself not in the context apparently unfair) would not be effective against the consumer: the unfairness of the term makes it “not binding” on the consumer”

I would ask you to read the above quote carefully. It is not whether a lender raises its interest rates by 50% or 200% that is important in determining the unfairness of such an interest rate clause. What is the determining factor regarding the unfairness of such an interest variation clause is the fact that the clause gives the lender the possibility to do exactly what you stated in your post that makes such a term an unfair term. This nuance is sometimes lost on the legal fraternity (possibly on purpose).

 

[CarrotStick]

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

Why would they, if the particular interest rate variation clause in the mortgage loan agreement states that the particular provider can vary rates at its sole discretion. Then, according to some, the provider does not have to link it to it’s funding costs unless the contract states that specifically, like in Ulster Bank’s Cost of Funds rate mortgage.

 

[Sarenco]

Good Luck trying to get the FSPO or Courts to rule on the EU Unfair Terms

The Supreme Court ruled a few years ago that a variable rate interest clause was not unfair on its face.

Here’s a summary -

Recent Developments regarding unfair Terms in… | Dillon Eustace

Recent Irish Supreme Court and Court of Justice of the European Union ( CJEU ) decisions, provide further clarity on the interplay between Council Directive 93/13/EC on Unfair Contract Terms in Consumer Contracts (the Directive ) (implemented in Ireland by the European Communities (Unfair Terms in…

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