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During the coronavirus pandemic, many residents will be worried about keeping up regular payments such as rent and service charges, or keeping up principal and interest payments on debt.
In this note we will look at two ways in which registered providers may be asked to allow time for payment.
- If an RP receives regular payments e.g of rent and service charges, and the resident loses their job because of coronavirus and can’t keep up payments, and the RP allows time for payment, is this regulated? Offering credit is a regulated activity, but there are exceptions.
- RPs who already offer regulated unsecured credit or mortgages, e.g. for deferred payment of leaseholders’ maintenance charges or under legacy Homes England and Greater London Authority equity loan schemes need to know about recent temporary guidance from the FCA on the impact of coronavirus on loans and mortgages.
Allowing time for regular payments
Where an RP makes a regular charge to a resident e.g for rent, service charges or a sinking fund, this is not usually credit. If the resident loses his or her job and cannot keep up payments, and the RP allows time for payment, the RP will probably want to structure this so that it is not regulated credit. The RP would need permission from the Financial Conduct Authority (FCA) to provide regulated credit, and there are strict rules relating to the form and content of a credit agreement, and provision of information before and after it is entered into, on an annual basis and before enforcement action is taken. Many RPs prefer not to “go there”.
The RP can simply state that it intends either to allow a rent free period, or to allow all or part of the rent etc to accrue and not be paid for a period. This is known as forbearance. We understand that the FCA takes the view that this is not regulated credit. But care is needed here. The RP is likely to want to set limits on any concession it makes: for example, how long it lasts and whether the RP will seek to recoup any uncollected rent when the period ends. If the arrangement is a formal agreement, and in particular if there is any interest or other charge for credit, it could amount to credit (which is defined simply as financial accommodation), and as such could be regulated.
If the RP takes possession proceedings or threatens to take possession proceedings against a resident for non-payment and the resident agrees an instalment order allowing them time to pay in return for the RP not pursuing or starting the proceedings,, then again it is generally accepted that this is not credit offered by the RP. The current stay on possession claims does not prevent proceedings being issued, so there is no reason why these sort of agreements cannot continue as an alternative to possession and without them being treated as regulated credit.
There is also an exemption from credit regulation for an interest free loan repayable within 12 months and with no more than 12 instalments. Careful structuring is needed to stay inside the exemption.
Concessions under personal loans
The FCA has published guidance, which took effect from 14 April, on the impact of coronavirus on regulated personal loans and (separately) regulated mortgages (and regulated home purchase plans). This guidance only applies in relation to coronavirus and will be reviewed in 3 months. It excludes unregulated agreements and payday (high cost short term) credit, buy now pay later agreements, hire purchase, peer to peer lending, premium finance, credit card and other revolving retail credit and overdrafts.
Customers with difficulties which pre-date coronavirus are to be dealt with under FCA’s existing general forbearance rules and guidance, which apply separately to unsecured loans and to mortgages and home purchase plans. This should also be followed if the customer is still having payment difficulties after a coronavirus-based deferral.
The coronavirus guidance is based on FCA principle 6: to have regard to customers’ interests and treat them fairly, also (for mortgages) to act honestly, fairly and professionally in accordance with the customer’s best interest.
Where a customer experiences temporary payment difficulties resulting from coronavirus circumstances and so requests, a regulated firm should give a 3 month payment deferral (for a mortgage or home purchase plan this is a “payment holiday”) unless in the firm’s reasonable view this is not in the customer’s best interest. During the deferral the customer would make no payments and would not be considered to be in default. The customer can request a payment deferral in the next 3 month.
A deferral might be not in the customer’s best interest if it results in a bigger overall debt burden than other solutions, and the burden is unsustainable. The firm is not expected to make enquiries with every customer to assess this. If the 3 month deferral is not appropriate the firm should, reasonably promptly, offer other temporary relief e.g. reduced payments or a rescheduled term.
Firms should make clear to customers that these deferrals are available, including on websites. Where a customer indicates they are or may be experiencing payment difficulties because of the virus, the firm should ask if they want it to offer a deferral.
Firms can charge interest during the deferral. Customers should receive adequate information on the impact of a payment deferral e.g. the effect of interest accrual on the number and amount of future payments. Specialist advice should be taken on the form of any information on changes to payment terms, as this needs to comply with specific regulations. A firm should not charge fees for offering a deferral or other solution. The firm should avoid allowing a payment deferral to impact on the customer’s credit rating.
Mortgage lenders should not repossess at this time, and should let customers know the impact of non-repossession e.g. on the customer’s remaining equity.