Unenforceable loans become slightly more enforceable

Over the last couple of years a whole industry has sprung up in response to changes to the Consumer Credit Act. Many lenders failed to adjust their contracts and practices to comply with the revised act, and as a result, many loans have been rendered ‘unenforceable’.

As the prospect of not paying back your loans is rather appealing to most of us (not to mention the opportunity to stiff the banks who have so soundly stiffed us all recently) some 3000 claims management companies (CMCs) have been created. They specialise in exploiting these loopholes on behalf of people with loans.

Last week saw a landmark ruling pertaining to one widely used ‘get out clause’ – where a lender is unable to produce the original signed agreement.

A CMC argued the case on behalf of a Royal Bank of Scotland customer, Phillip McGuffick, seeking to have his £17,000 loan from RBS declared unenforceable on these grounds.

RBS admitted to being unable to provide the relevant documents. The loan was hence unenforceable. They did, however, forward details of his 'default' to the main three credit reference agencies, Experian, Equifax and CallCredit.

McGuffick argued that RBS should not have registered his details with the credit agencies as a 'default'.

When a borrower requests a signed copy of the original loan agreement, the lender has one calendar month plus 12 days to produce it. If they cannot, they fall into a 'period of non compliance' and the loan is deemed unenforceable.

This labrador doesn't have to pay back his loan - but his credit rating has suffered

The High Court Judge dealing with this case ruled that consumers should not stop paying their loan repayments while the claim is still in dispute.

In many ways this ruling has muddied the waters even further, leaving consumers involved with this type of case with two options. They can either pay back the ‘unenforceable’ loan to protect their credit rating. Or they can thumb their noses at the lenders who can now pursue the debt by deducting monies from other accounts that the borrower may hold with them or by putting a lien on properties that they have a charge on. While lenders can use debt collectors to harass the customers, they cannot instruct bailiffs.

Many opponents of these ‘get out clauses’ on loans are hailing this as a victory for the lenders. However, in the current climate of a credit drought, many borrowers may quite happily exchange a bad credit record for not having to pay off a loan.