ME Group, the firm co-ordinating the action, told Mortgage Solutions it had already had engagement from lenders with a small volume of customer cases being settled.
It believes thousands of mortgage prisoners have been charged excessively over a ten-year period.
It argued lenders increased the spread between their borrowing costs and the rates charged to borrowers purely to boost revenue and profitability.
The issues largely surround borrowers who took out a mortgage before the 2012 implementation of the European Consumer Protection Law regarding how lenders were allowed to vary interest rates.
The focus of the cases includes whether lenders had fulfilled two key points of:
- borrowers being able to independently verify why the rate was changing, for example an increase to Bank of England base rate,
- and customers who did not wish to accept the increased rates being able to exit the contract without a financial cost.
Since the legal precedent in 2012 almost all lenders have updated their terms and conditions so that they are compliant.
How will they remediate?
ME Group CEO Rob Cooper told Mortgage Solutions that it believed the potential compensation due to customers was staggering.
The firm has seen issues from lenders across the spectrum and anyone on a follow-on rate or SVR could be impacted.
However the sub-prime sector was typically source of the greatest volume of claims and mortgage prisoners were the most commonly and significantly affected.
Cooper added that the firm was already seeing early engagement from lenders and anticipated that on the basis of those engagements, lenders would be refunding customers.
“The question is how lenders will remediate. Will they honour the statutory interest that would normally be applicable to the money they have overcharged or are they seeking just to remediate the level of overcharging,” he said.
“The legal position is that the lender should remit the over payment to the borrower and that’s important.”
He added: “It shouldn’t be a case of writing down the capital balance further so borrowers finish the mortgage earlier, because that would be changing the terms of the contract.”
“We’ve got engagement with lenders and have cases which have settled although those are in relatively small volume, but in terms of widespread approach we’re only just entering that process now.”
ME Group could not provide an exact number of people it had assessed, but said the average amount that these customers were due to receive back was in the region of £70,000-£80,000.
It is also calling on the Financial Services Compensation Scheme and Financial Ombudsman Service to fast-track decisions to ensure vulnerable people can get their lives back on track.
The issue of mortgage prisoners has been a serious one within the industry with the Financial Conduct Authority (FCA) urging lenders to take action and UK Finance unveiling a plan.
The FCA did not comment on the issue.
However, a consultation considering variation of terms earlier this year said: “Our day-to-day unfair terms case work has considered variation terms from a variety of products and does not suggest that variation terms have generally been used in a manner likely to cause widespread harm to consumers.”
The regulator is also due to publish a paper on forbearance in mortgage arrears on Thursday and confirmed this issue would not be part of it.
Rules need to change
A UK Finance spokesman noted that regulated lenders are required by the FCA to treat customers fairly and work within a clear regulatory framework to ensure customers are provided with the correct information about their mortgage, prior to and during the product term.
“The industry has already made a voluntary commitment to help longstanding borrowers on reversion rates with active lenders switch to a new deal,” he said.
“However, many ‘mortgage prisoners’ are with inactive lenders or unregulated owners and therefore cannot switch to a new deal due to current legislation. We will continue working closely with the government and FCA to look at how active lenders might be able to support these customers.
“This could include changing the current rules to make it possible for customers who want a like-for-like mortgage to move between lenders more easily.”
The trade body added that it wanted to encourage customers who might be thinking about making a complaint to contact their lender direct.
“Speaking to a lender directly rather than going through a claims management company means that customers will not be charged a fee,” it said.
“It also helps ensure that any concerns are dealt with promptly and that all updates are provided straight to the customer.”