McGinn v Grangewood Securities Ltd

Whether a payment made from a loan advance is part of the total charge for credit depends on the true cost to the debtor in the circumstances. The court must consider the agreement, related documents and the objective purpose of the borrowing. A payment of mortgage arrears is not necessarily part of the credit merely because the agreement requires it.

Where payment of the arrears was not an objective purpose of the loan, but was imposed by the lender and deducted from the advance, it was an other charge and part of the total charge for credit. Under the Consumer Credit Act 1974, its inclusion in the stated amount of credit meant that no signed document contained the prescribed term correctly. The agreement and its security were therefore unenforceable.

The borrower entered a regulated consumer credit agreement secured by a second charge over her home. The lender deducted £359.29 from the advance and paid it to the first mortgagee in respect of arrears. It also deducted a broker's fee and made separate provision for legal costs.

His Honour Judge Langan QC, sitting in Norwich County Court, determined preliminary issues in the lender's favour and declared that the agreement and charge were not improperly executed. The borrower appealed on the treatment of the mortgage arrears, legal fees and broker's fee.

The central issue was whether the payment of the first-mortgage arrears was part of the total charge for credit, with the consequence that the amount of credit had been incorrectly stated in the signed agreement.

1. Appeal allowed unanimously. Lord Justice Clarke gave the judgment, with which Lady Justice Hale and Lord Justice Kennedy agreed. The £359.29 paid to clear the first-mortgage arrears was an other charge and part of the total charge for credit.

2. The governing inquiry was the true cost to the debtor of the credit. Following the approach in Watchtower Investments Ltd v Payne [2001] EWCA Civ 1159, the court had to examine all the circumstances, including the contractual documents and the objective purpose of the borrowing. A contractual requirement to pay an existing debt did not by itself determine whether the payment was credit or a charge.

3. Unlike Watchtower, clearing the arrears was not an objective purpose of this loan. The borrower sought funds to extend and refurbish her home. The lender decided to deduct the arrears after learning of them, and the deduction operated in the same practical way as the broker's fee. The payment was therefore a cost of obtaining this credit, rather than financial assistance forming part of the credit itself.

4. The payment was also payable under the transaction. The credit agreement expressly required first-mortgage arrears to be discharged before completion. The fact that the borrower also owed the first mortgagee under a pre-existing and distinct mortgage did not prevent the payment from being made under the credit agreement.

5. By section 9(4) of the Consumer Credit Act 1974, the charge had to be excluded from the amount of credit. The signed agreement should therefore have stated £6,988.71, rather than £7,348. As no signed document contained the prescribed term correctly, section 127(3) prevented an enforcement order under section 65(1). The agreement, and the security supporting it, were unenforceable.

6. The legal-fees issue did not require decision. Clarke LJ nevertheless expressed the provisional view that a lender intending to defer legal fees only on terms that contractual interest would be charged should state that power, and the resulting payments, in the signed agreement. The broker's-fee issue and the remaining proposed appeals consequently did not arise for determination.

• Court of Appeal (Civil Division) — Allowed the borrower's appeal: [2002] EWCA Civ 522.
• Norwich County Court — His Honour Judge Langan QC determined preliminary issues in the lender's favour and declared the agreement and charge not improperly executed by orders dated 6 October and 20 November 2000.