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Proper lending conduct: Mason v Godiva Mortgages

Mortgage document with key Print publication

11/04/2019

Banking & Finance Litigation Partner Richard Sandford reviews the recent case of Mason v Godiva Mortgages [1] and provides practical advice for lenders facing claims, from disappointed borrowers, of breach of statutory duty.

Why is this case of interest to lenders?

Where borrowers get into financial difficulties and the lender/borrower relationship breaks down, it is common for disappointed borrowers to try to recoup some of their losses via a mis-selling or breach of duty claim against the lender.  The Mason v Godiva Mortgages case provides a recent, worked example of how the court will approach such cases and it highlights that it can be difficult for these claims to succeed.

What were the facts?

The claimant borrowers had entered into a self-certification, interest-only remortgage with the defendant lender with the assistance of a mortgage broker. The borrowers, who co-owned and ran a property development business, were both approaching the age of retirement. The broker had listed the borrowers’ salaries incorrectly at around £100,000 each and the subsequent affordability calculations were mistaken.

Ultimately, the borrowers were unable to repay the capital at the end of the mortgage term. They sued for breach of statutory duty [2], claiming that the lender was in breach of statutory duty for not checking that the stated income was false and that the loan was unaffordable and should never have been offered.

What did the court decide and why?

Taking a clear and comprehensive approach, the High Court considered: had the lender breached any duty to exercise care and skill in advising on the suitability of the mortgage product; and/or had the lender breached its regulatory obligations under MCOB?

The court found that the lender had not provided any advice on the suitability of the remortgage and had made clear in its offer letter that it was not doing so.  The lender was not therefore in breach of any contractual or tortious duty of care.

Considering the particular MCOB provisions that were relevant to the case (that is, those that were in force at the date of completion of the remortgage), the lender’s duties were:

  • to take proper account of the borrower’s ability to pay the mortgage;
  • to consider fully the appropriateness of a self-certification mortgage having regard to the interests of the customer; and
  • to have in place, to and operate in accordance with, a written affordability assessment policy setting out the factors to be taken into account.

The High Court found on the evidence that the lender had complied with its statutory duties. The lender proved that it had acted reasonably by showing that it had considered that the borrowers’ salaries, despite being clearly high, were not suspicious in line with their occupation.  The fact that questions were asked about whether the borrowers would continue working past the age of 75 (which would be within the term of the mortgage) demonstrated that the application was not just ‘waved through’. In terms of the lender’s obligation to enter into a self-certification mortgage only where appropriate having regard to the interests of the customer, the lender was able to show that it did not offer self-certification mortgages to first-time mortgagors; the borrowers had had a previous mortgage with a similar monthly repayment on which they had not defaulted; and they were being advised by an authorised intermediary who could properly be assumed to have given competent advice.  The lender was also above to provide a lending policy setting out the factors to take into account in assessing a customer’s ability to repay, and to demonstrate its compliance with that policy.

Comment and practical advice

Though the particular facts of the case are clearly relevant (the intermediary, the borrower’s mortgage history, etc.), this judgment clearly shows that the court placed significant reliance on the additional steps taken and queries raised by the lender as part of its decision-making process.  Ultimately, a key factor in the lender’s successful defence was the strength of the evidence it was able to provide.  Lenders should therefore ensure that they have in place policies to support their decision-making processes, and that they comply with them – and, crucially, can demonstrate compliance – at all times.

This case also demonstrates the value to a lender of making clear in its mortgage offer that it is not providing advice as to suitability of the product.

Finally, the judgment contains an ‘aside’ which will no doubt be helpful for any lender faced with a similar claim from a disappointed borrower: even if the lender had been in breach of their common law, contractual or statutory duties, the borrower’s losses claimed would not have been recoverable in any event.  Paragraphs 64 – 66 demonstrate that the borrowers would not have been able to establish that any losses suffered by them actually flowed from any breach by the lender [3].  Borrowers often overlook that they have had the benefit of, and have to give credit for, the mortgage advance and that can significantly undermine, or even extinguish, these types of claims.

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[1] [2018] EWHC 3227 (QB)
[2] under section 150 of the Financial Services and Markets Act 2000, that being a right of action for breaches of Financial Conduct Authority (FCA) rules – in this instance the Mortgages and Home Finance Conduct of Business sourcebook (MCOB)
[3] For example, had the income stated in the application form been queried and found to be false, the borrowers would not have been offered the remortgage at all and they would have had to sell their house to redeem their existing mortgage. It would not therefore be legally possible for the court to make an award of damages, as claimed, which would have the effect of writing off the entirety of the loan.

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