Ruling could cost former Northern Rock £250m

The former Northern Rock could be facing more than 40,000 claims for repayments totalling around £250m, following a high court ruling in two test cases over additional loans offered to mortgage customers. NRAM, the nationalised lender previously known as Northern Rock, had sought to fend off the claims with a declaration that the loans to which they relate were unregulated and so not subject to the strict requirements of the Consumer Credit Act 1974. However, Burton J ruled on 10 December that the key rights and remedies provided by section 77A of the Act were imported into the agreements made with two representative borrowers, who took out loans under the Together Mortgage scheme. He said: “I conclude that the claimant was in breach of its obligations under the agreement by virtue of its failure to indemnify the defendants in respect of its breach of section 77A. “I am satisfied that the defendants are entitled to recover, pursuant to contract, the section 77A repayments.” Though it is yet to be decided what redress, if any, will ultimately have to be provided by NRAM to borrowers with identical agreements, the judge said that the action had been brought to enable the court to resolve a dispute between NRAM and “some 41,000 other borrowers who stand in the same position”. He added: “If the claimant is obliged to provide redress to the approximately 41,000 borrowers in the same position as the defendants, the current cost of doing so will be about £258 million.” The judge said that, between 1999 and March 2008, Northern Rock entered into a large number of unsecured credit agreements as part of the Together Mortgage product, which allowed borrowers to borrow up to 95% of the value of their home on a secured basis, and, in addition, to take out a fixed sum unsecured loan of up to 30% of the value of their home, capped at £30,000. He said that it was an advantageous feature of the product that, for so long as the secured loan remained outstanding, interest on the unsecured loan was charged at the same rate as in respect of the secured loan. In the two representative cases, the borrowers borrowed the full £30,000 amount, above the £25,000 limit for regulated loans under the Act. However, the paperwork for the unsecured credit agreements under the product did not differentiate between regulated and unregulated agreements – the same documentation was used for unsecured loans of more than £25,000 as was used for loans of £25,000 or less. Burton J was asked to determine the effect of the unregulated agreements having been documented in this way, and whether the rights and remedies available under the 1974 Act, or equivalent protections, were imported into those agreements that fell outside of the statutory scheme. The dispute arose after it emerged in late 2012 that Northern Rock failed to implement the requirements of section 77A and the Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007 correctly. Explaining the failing, the judge said: “In particular the statements provided to borrowers (provided by the claimant in the same form whether or not the amount of credit exceeded £25,000) did not state the amount of credit originally provided to the borrower under the agreement as required in relation to a regulated agreement by paragraph 3(b) of schedule 1 to the 2007 Regulations.” NRAM has provided redress to those borrowers who had regulated agreements, furnishing them with a set of corrected statements and re-crediting to their account any sum wrongly debited on account of interest and default sums in respect of the period of non-compliance. However, it has not provided any redress to borrowers who entered into agreements before 6 April 2008 under which the amount of credit provided exceeded £25,000. Though the judge acknowledged that it was common ground that the representative borrowers’ agreements were not regulated agreements, he said: “However both within the loan agreement itself and in the wider suite of pre-contractual and contractual documentation, the claimant repeatedly informed the borrowers that the loan was regulated by the 1974 Act and that they would benefit from the rights available under that enactment.” NRAM plc v McAdam and anr Commercial (Burton J) 10 December 2014 Malcolm Waters QC and Patrick Goodall QC (instructed by Ashurst LLP) for the claimant John Taylor QC and James McClelland (instructed by Simmons & Simmons LLP) for the defendants