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Lenders can charge interest on arrangement fees, Supreme Court rules

8 July 2010

Lenders can charge interest on arrangement fees paid by borrowers on mortgages regulated by the Consumer Credit Act 1974, the Supreme Court has ruled.

Michael and Jane Walker argued that their lender, Southern Pacific Securities, had incorrectly calculated the amount of credit payable under a second mortgage of their home in Cheshire.

Under the CCA 1974, had the Supreme Court agreed with them, the mortgage would have been unenforceable, as would huge numbers of other loan agreements for less than £25,000 made before April 2007.

Giving judgment on behalf of the court in Southern Pacific Securities 05-2 v Walker and Anor [2010] UKSC 32, Lord Clarke said the issue was whether the “amount of credit” in the Walkers’ agreement was correctly stated at £17,500.

He said that it was common ground that a further £875, the “broker administration fee”, was subject to interest at the same rate.

Lord Clarke said the two sums together, the “total amount financed” in the agreement, came to £18,375.

The borrowers argued that since the total amount of the loan was £18,375, the ‘amount of credit’ was £18,375.”

Lord Clarke said that under the CCA, failure properly to include a term stating the amount of credit meant the agreement was “irredeemably unenforceable.”

However, he said the problem was that section 9(4) of the CCA provided that an item entering into ‘the total charge for credit’ should not be treated as credit.

“It follows that if an item is part of the total charge for credit, it cannot form part of the amount of credit, even if it would otherwise be regarded as credit,” he said.

The Supreme Court dismissed the appeal.

“We merely note by way of postscript that, if the fee had been included in the amount of credit, so that the ‘amount of credit’ was stated as £18,375, the borrowers would no doubt have said that the loan was unenforceable on the ground that the fee was part of the cost of the credit and should not therefore have been treated as part of the credit.”

He went on: “We can see that there might be cases in which, on analysis of the facts, it might be held that the loan to pay a charge was a separate credit which should be made the subject of a regulated agreement but it is not easy to envisage such a case.

“In any event there is no question that this is such a case. Here the ‘broker administration fee’ was simply part of the cost of the credit and thus not to be treated as part of the credit.”

Lord Clarke added that the CCA 1974 did not apply to agreements made after 5 April 2007, when Sections 15, 70 and Schedule 4 of the Consumer Credit Act 2006 were implemented.

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