Converting from capital repayment to interest only – a ‘reasonable adjustment’?Print publication
The Court of Appeal has held that a mortgage lender was not required to accede to a borrower’s request to provide her with an interest-only mortgage when she was unable to meet her mortgage repayments by reason of her disability. Neither the Disability Discrimination Act 1995 nor the Equality Act 2010 required the lender to agree to switch from a capital and interest mortgage to an interest-only mortgage. Walker Morris’ partner Louise Power explains the recent case of Green v Southern Pacific Mortgage Ltd  and its implications for lenders.
In 2006 the borrower took out a mortgage that was repayable on a capital and interest basis and was secured against her home. In 2008 the borrower suffered from clinical depression (amounting to a disability under the Disability Discrimination Act 1995 (the DDA) and the Equality Act 2010 (the EA)), became unemployed and fell into mortgage arrears.
The borrower requested to be transferred to an interest-only mortgage, explaining that she required lower monthly repayments. The lender refused to meet this request (although reasons for the refusal were not explained to the borrower, the lender had a policy not to convert capital and interest mortgages into interest-only mortgages (the Policy)) and applied for a possession order.
The borrower argued that, in refusing her request to be transferred to an interest-only mortgage, the lender had failed to make a reasonable adjustment in respect of her disability under sections 19 – 21 (1) of the DDA and/or under the EA.
The County Court held that lender was not in breach of the DDA or the EA and accordingly a possession order was granted. The borrower appealed.
The Court of Appeal decision
The Court of Appeal rejected the legal arguments put forward by both parties. It noted that sections 19 – 21 of the DDA provide that it is unlawful for a provider of services (including financial services) to discriminate against a disabled person by failing to take reasonable steps to change a practice, policy or procedure that makes it impossible or unreasonably difficult for such persons to use a ‘service’ which is provided to other members of the public (so long as that this does not require fundamental alteration to the nature of the service in question).
The Court of Appeal considered the following central questions, all of which are relevant in terms of a lenders’ policy and practice, before ultimately upholding the ruling of the County Court:
- What was the relevant ‘service’ provided by the lender to the borrower? The Court of Appeal held that the relevant ‘service’ was provision of a capital and interest mortgage – that is, the ‘service’ in question was not to be defined as the provision of mortgages generally, but rather the provision of the particular type of mortgage . The court also noted that an interest-only mortgage is a fundamentally different service to the one provided to this particular borrower.
- Did the lender’s Policy not to convert from a capital and interest mortgage to an interest-only mortgage make it impossible or unreasonably difficult for the borrower to access the service compared to other members of the public? The Court of Appeal found that there was no evidence that the Policy unfairly discriminated against disabled people. Rather, the Policy applied equally to all customers, and so did not discriminate.
- If the Policy had discriminated against disabled people, would it have been a reasonable adjustment for the lender to offer an interest-only conversion to disabled people? It was unnecessary for the court to answer this question on the facts of this particular case. However, for the sake of completeness, the court noted that interest-only mortgages represent a less certain form of security for a lender in comparison to capital and interest mortgages. It concluded that to abandon the security which it had agreed with the borrower, and instead to accept a much more speculative and uncertain security by way of an interest-only mortgage, would not be a reasonable adjustment that the lender should make.
WM comment and practical advice
This decision will be welcomed by lenders concerned by the potential scope of their obligations to borrowers under the DDA and EA. The Court of Appeal has drawn a firm distinction between capital and interest mortgages on the one hand, and interest-only mortgages on the other. In particular, the Court was keen to protect the enhanced security gained by lenders under capital and interest mortgages. Lenders are therefore under no obligation to comply with borrower requests to be transferred from capital and interest mortgages to an interest-only mortgages. This applies even where the borrower suffers from disabilities recognised under the DDA and EA. So long as such a policy is applied equally to all customers, lenders should find themselves compliant with equality legislation.
Over and above the decision itself, however, Lord Justice Peter Jackson’s judgment in this case  (at paragraphs 85-97) is a ‘must read’ for all lender services colleagues concerned with compliance and treating customers fairly. The judgment voices strong criticism of: the lender’s unclear and unreasoned “blanket refusal” to consider converting the mortgage or to compromise the proceedings in any way; its lack of consideration throughout for its customer’s disability ; its “disingenuous defence” (which attempted to evade disability legislation obligations altogether through “legal casuistry”); its “opaque practices, policies and procedures”; its “disorganised” approach at trial; and the “staggering” and uncontrolled costs (totalling £269,000) which, it was assumed, would be debited to the mortgage account.
  EWCA Civ 854
 Edwards v Flamingo Land Ltd  EWCA Civ 801
 which can be accessed here
 which, medical evidence demonstrated, deteriorated as the proceedings progressed