Law Commission Guest Blog

We are pleased to announce that FairMoney.com and The Campaign for Fair Finance have been invited by the Law Commission to assist them with their consultation on how to make some loans fairer for the consumer through amendments to the Bill of Sale Act.

To kick off the collaboration FairMoney has asked the Law Commission to write a short blog outlining their proposed ideas and points for discussion.

The Law Commission

The Law Commission is an independent body created by the Law Commissions Act 1965 to review and modernise the law.

In September 2014, the Treasury asked the Law Commission to look at the legislation regulating logbook loans and consider how it can be reformed. The Law Commission published its provisional proposals in September 2015. These include measures intended to give borrowers in default and those who innocently buy vehicles subject to logbook loans more protection.

How to Have Your Say

The Law Commission’s proposals are very much provisional. It is seeking views from those who may be affected. Responses will be analysed and used to formulate its final recommendations for reform, due to be published in summer 2016. The consultation closes on 9 December 2015.

If you have an opinion and want your voice heard you can contact the Law Commission by emailing them at:

bills_of_sale@lawcommission.gsi.gov.uk

OR

by post to:    

Fan Yang, Law Commission, 1st Floor, Tower, Post Point 1.53, 52 Queen Anne’s
Gate, London, SW1H 9AG
Tel: 020 3334 3385

The provisional proposals discussed here are part of a wider consultation. Further information is available at http://www.lawcom.gov.uk/project/bills-of-sale/.

What are Logbook Loans?

Logbook loans are a form of secured lending. When a borrower takes out a logbook loan, they transfer ownership of their existing car, van or motorcycle to the lender. If the borrower keeps up the repayments, they may keep using the vehicle. But if the borrower defaults, the lender can seize the vehicle and sell it to recoup the money outstanding under the logbook loan. The vehicle is the lender’s “security” for the loan money.

How are They Regulated?

Logbook loans are regulated by two Victorian pieces of legislation dating from 1878 and 1882. The legislation is particularly opaque, and has been criticised almost since its enactment. Over the past hundred years, there have been many calls for the current law to be repealed or reformed, but the legislation has remained in force.

Provisional Proposals to Protect Borrowers in Default

Court Order

Under the current law, lenders are not required to seek a court order before repossessing a vehicle from a borrower in default. Instead, lenders must issue a notice of sums in arrears when the borrower has defaulted, followed by a default notice if the lender wishes to repossess the vehicle. After the lender has issued the default notice, the borrower has 14 days in which to remedy the default.

Consumer groups have criticised the current law as failing to offer adequate protection to borrowers in default. They suggested that lenders should be required to obtain an order from a judge authorising them to repossess the vehicle before being able to take this step. This protection already applies to hire purchase.

The Law Commission is seeking views on its provisional proposal that logbook loan borrowers should receive the same protection as hire purchase borrowers: once the borrower has paid one third of the total amount of the logbook loan, the lender would need to obtain a court order to repossess the vehicle.

“Total amount” means the amount that the borrower would have to pay if the logbook loan runs its natural course. This would include any arrangement fee and interest charges but exclude, for example, any default charges.

The one third threshold is intended to distinguish between borrowers who cannot pay and those who will not pay. Where a borrower has demonstrated an intention to pay before running into temporary financial difficulties, the Law Commission proposes that they should be protected by the court order. By contrast, those borrowers who default before the one third point may be thought of as those who never intended to pay. These borrowers would not receive the benefit of court protection.

Pros and Cons of the Court Order

Pros

• The prospect of court proceedings could encourage borrowers to seek debt advice or to negotiate with the lender. While borrowers may ignore notices of sums in arrears and default notices, a letter notifying them of court proceedings can act as a catalyst for them to take action.
• The need for a court order would encourage lenders to view repossession as a measure of last resort. A code of practice for logbook lenders drafted by the trade body that represents them – the Consumer Credit Trade Association – and rules published by the Financial Conduct Authority already provide that repossession is a measure of last resort. A court order would emphasise this.
• The role of the judge as an impartial adjudicator provides borrowers with a degree of comfort. This is particularly the case where a borrower has already had experience of the court process.
• Repossession is a serious act that should be subject to court supervision. It is an act that is not pleasant for the borrower or the lender and so court supervision may be a helpful measure.

Cons

• The court process entails costs. In addition to the court fee – currently £155 and set to rise to £255 – lenders would also have to pay ancillary costs, such as legal fees. The Law Commission proposes that lenders should be able to pass the court fee on to borrowers if they are successful in obtaining a court order.
• Delay is an inevitable part of the court process. It can take several months for a county court to hear the matter. During this time, borrowers will be able to keep the vehicle and arrears will continue to accrue. The Law Commission proposes that borrowers should remain liable for arrears and any shortfall following sale of the vehicle.
• It can be difficult to enforce a court order using county court authorised enforcement agents, previously called “bailiffs”. The Law Commission proposes that lenders would be able to use their own employees or private enforcement agents to repossess vehicles.

Voluntary Termination

The court order would do little to protect borrowers who have no means of repaying the logbook loan. In these circumstances, a judge is likely to grant an order giving the lender permission to repossess the vehicle. The court process would merely have introduced delay and increased costs before the borrower in any case loses their vehicle.

The Law Commission is seeking views on its provisional proposal that borrowers who have no means of repaying their logbook loan should have the right of voluntary termination. The borrower would be able to hand their vehicle to the lender as full and final settlement of the logbook loan.

Many borrowers already have a right of voluntary termination if the lender is a member of the Consumer Credit Trade Association that has subscribed to the code of practice. The Law Commission’s proposal is modelled on that code of practice. Until the lender has incurred costs to repossess the vehicle, borrowers would be able to hand their vehicle to the lender:

1.    immediately, without any particular percentage of the logbook loan having been repaid; and
2.    as full and final settlement of the logbook loan.

There would be two restrictions on the right of voluntary termination. The borrower would not be able to exercise the right if:

1.    the vehicle has sustained malicious damage of whatever nature; or
2.    the borrower has not taken reasonable care of the vehicle and its sale value is significantly affected as a result.

Provisional Proposals to Protect Purchasers

There has been much criticism from consumer groups and the media that purchasers who buy vehicles subject to a logbook loan receive no protection. This is the case even if the purchaser bought the vehicle completely innocently and with no knowledge of the logbook loan. As the lender owns the vehicle, it is within its rights to seize the vehicle from the purchaser. Often, purchasers are given three choices: pay the logbook loan, pay the lender for the vehicle or else surrender the vehicle. From the purchaser’s perspective, all three options are unfair.

The Law Commission is seeking views on its provisional proposal that where a private purchaser buys a vehicle in good faith and with no knowledge of the logbook loan, they should own the vehicle. The lender would not be able to seize the vehicle from them.

The protection would only cover “private purchasers” who buy vehicles for personal use. Trade purchasers are expected to protect themselves with “vehicle provenance checks”. These are checks that can be carried out online that would reveal the full background of a vehicle, including whether it has ever been stolen, suffered a total insurance loss and whether it is subject to a logbook loan. Such vehicle provenance checks are widely used by trade purchasers and others in the motor industry, but consumers currently have little awareness of them.

In the long-term, the ideal position would be for private purchasers to also protect themselves by carrying out vehicle provenance checks. If these checks were widely used by consumers, then legislative protection may no longer be necessary.