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MORTGAGE ARREARS AND REPOSSESSIONS IN SCOTLAND
Annex Five: CML STATEMENT ON DEBT FOLLOWING MORTGAGE POSSESSION
WHAT HAPPENS TO A MORTGAGE DEBT AFTER A HOME IS REPOSSESSED?
A5.1 After a lender takes a property into possession, interest will generally continue to be charged on the mortgage loan until the property is sold. There will also be other costs charged to the mortgage account, including estate agents costs in selling the property, and legal costs.
A5.2 The lender has a legal duty to sell the property for the best price that can reasonably be obtained. If this results in a surplus after all the money owed to the lender and any other party with a registered legal interest has been repaid, then this surplus is returned to the former borrower. But if the sale proceeds are not enough to pay off the money owing to the lender, the borrower faces a ?shortfall debt, which they still owe to the lender after possession.
WHAT WILL THE LENDER DO IF THERE IS A SHORTFALL DEBT?
A5.3 The action that the lender will take depends on the circumstances. Usually, the lender will contact the borrower as soon as possible after the sale of the property and give a final financial statement. This will show the level of debt still owing to the lender. It is important that borrowers keep lenders informed of their addresses after possession so that they receive this information.
A5.4 If there is a shortfall debt, the lender may:
- immediately invite the borrower to contact them with their proposals to discuss how they might repay the debt; or
- try to give the borrower some time to get back on their feet financially before contacting them about repaying the debt.
HOW LONG AFTER THE REPOSSESSION CAN LENDERS SEEK THE RECOVERY OF THE DEBT?
A5.5 In England, Wales and Northern Ireland, a lender legally has 12 years in which to contact the borrower to begin the process of obtaining repayment of shortfall debt; this period is usually 5 years in Scotland.
A5.6 However, lenders are committed to fair and sympathetic treatment of people who have suffered the unavoidable loss of their home, and accept that individuals should not face long delays before lenders contact them to discuss repayment of the shortfall. In practice, where a forwarding address is known, most lenders will contact borrowers fairly soon after possession has occurred with a view to agreeing a manageable arrangement for repaying all or some of the debt.
A5.7 In addition, from 11 February 2000, lenders who are members of the Council of Mortgage Lenders have agreed voluntarily that they will begin all recovery action for the shortfall within the first six years following the sale of a property in possession. Anyone whose property was taken into possession and sold more than six years ago, and who has not been contacted by their lender for recovery of any outstanding debt will not now be asked to pay the shortfall. The Association of British Insurers supports this approach on behalf of the mortgage indemnity insurers.
DOES THIS TIME LIMIT APPLY TO EVERY CASE?
A5.8 The new time limit does not affect anyone who is already adhering to alternative payment arrangements for the shortfall debt or who has already been contacted by the lender, even if the initial contact was made with them by the lender after six years from the date of the sale of the property in possession. The six year limit only refers to beginning recovery action and does not affect a lender's ability to recover the shortfall debt over a longer period. If there is evidence of mortgage fraud, the new time limit will not apply.
A5.9 Following the sale of a property in possession, lenders often find it difficult to contact the former borrower to advise them of any surplus monies or shortfall debt. Lenders use a variety of measures to identify where the individual is now living. This might include using tracing agents. Situations can arise where a lender or its third party agent is trying to contact the individual (for example, by letter or telephone) to discuss repayment of the shortfall, but the individual simply chooses to ignore such contact. This is despite the fact that the contact is being made at the individual's new address. In these cases, lenders will consider that contact has been made for the purposes of the new six year limit. If an individual is unclear whether contact has been made within the six year period, the lender will be able to confirm the position.
HOW WILL THE NEW SIX-YEAR LIMIT BE INTRODUCED?
A5.10 The CML Statement of Practice on Arrears and Possessions will be updated to refer to the six year limit, together with other suggestions put forward by money advice groups. These suggestions include:
- lenders reminding borrowers in arrears letters of their continuing liability for the shortfall debt;
- lenders reminding borrowers to provide them with a forwarding address following possession. The Government is expected to announce that Electoral Register Data can no longer be used for tracing as part of loss recovery procedures. It will therefore be important for borrowers to provide forwarding addresses and for lenders to commence shortfall recovery action at an early stage.
- lenders ensuring that borrowers have full information on the shortfall debt, including a detailed breakdown of any costs and charges that have been applied to the mortgage account following possession.
A5.11 All CML members have adopted the Mortgage Code and have agreed to adhere to the Statement of Practice. A revised version of the Statement should be available in the next few months.
A5.12 All CML members have adopted the Mortgage Code and have agreed to adhere to the Statement of Practice. A revised version of the Statement should be available in the next few months. The new policy has been discussed with the National Association of Citizens Advice Bureaux and the Federation of Independent Advice Centres, who had both asked the CML to consider the change.
May 2001
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