Regulator imposes requirements on Royal Bank of Scotland’s use of charging orders – a debt collection method for recovering unsecured debts that could see borrowers lose their homes.
State-backed bank RBS has been ordered by the Office of Fair Trading (OFT) to stop using controversial “charging orders” to collect small debts.
It is concerned about the “oppressive” use of these legal orders, which can allow a lender to make a claim against a borrower’s home even if the debt was taken out on a credit card or loan.
The regulator has imposed restrictions on the way Royal Bank of Scotland and NatWest, both members of the RBS Group, are enforcing debts on their customers.
A bank can apply to a court for such an order if a borrower fails to keep up with their payments on unsecured debts such as a credit card, a personal loan or hire purchase commitments.
The charging order secures the debt against your home or other property you own and means you could lose your home if you don’t pay back what you owe, although a further application to the court would need to be made to do this.
The OFT said that it has concerns about RBS and Natwest’s failure to consider customers’ financial circumstances before asking the court to put a charging order in place.
In some cases the banks were using charging orders to secure disproportionately small debts as low as £5,000.
David Fisher, OFT director of consumer credit, said: “Lenders are entitled to use charging orders but they must do so proportionately and not to secure relatively small amounts of debt.
“Where we consider the use of charging orders to be unfair or oppressive we will take action to protect consumers.”
An investigation by the regulator in 2008 revealed four banks had told customers to pledge their homes against non-mortgage debt. This advice led to customers unwittingly putting their homes at risk of repossession.
Lenders also increasingly turned to charging orders as a more effective way of reclaiming debt as defaults grew. More than 111,311 orders were served in 2009, up from around 49,000 in 2005. In 2010, an OFT investigation found a charging order was made for a little as £600. A handful of lenders were censured, including Alliance & Leicester, American Express, HFC Bank (part of HSBC) and Welcome Financial Services (part of Cattles).
A spokesman for RBD Group said: “We are committed to helping customers who find themselves in financial difficulty. We changed the thresholds for using charging orders ourselves in 2008. The cases reviewed by the OFT preceded these changes. We use charging orders only as a last resort.”