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Extortionate credit

Extortionate credit (ss.137-140 of the Consumer Credit Act 1974 )

Any Court can re-open any credit agreement, whether regulated or not, where it considers that the bargain was grossly extortionate. The debtor must raise the matter and it is for the creditor to rebut it (s.171).

The Court shall have regard to all relevant circumstances, including interest rates prevailing at the time, the age, experience, capacity and health of the debtor, the pressure which the debtor was under at the time the bargain was struck, the risk to the creditor, and the creditor's relationship with the debtor.

It is very difficult to prove that an agreement is extortionate. There are few cases where the debtor won, and the interest rate was lowered, and since County Court cases are not binding on any other Court, the successes do not help much in other circumstances. However, two of the successful cases are :

Barcabe Ltd v. Edwards (1983) CCLR 11, where the lender had charged 100% flat rate per annum (APR 381%), other organisations would have charged only 20%, the lender took no exceptional risk, and the debtors were ignorant and illiterate. The Court substituted a 40% rate.

Castle Phillips & Co -v- Wilkinson and Wilkinson (1992) CCLR 83, where the lender, through brokers, provided a bridging loan of £21,000 for a period of between 4 and 6 months at 4% per month. It was held that the credit bargain was clearly extortionate because the interest rate was 3.33 times what a building society would charge, the security provided exceeded the nominal amount advanced, the borrowers were of little financial understanding, and had been persuaded to enter into an agreement which in normal circumstances they would not have entered into. The Court substituted a rate of 20% per annum, being the current building society re-mortgage rate plus one third to reflect the short-term nature of the loan.

One recent case - Hurstanger Ltd v Wilson (2006) is the only one where the agreement has been re-opened following a county court declaration that the lender's failure to state how a fee was to be paid was the result of "self-interested sloppiness". More details soon.

Note that from 31 October 2004, when the Financial Services Authority (FSA) takes over regulation of first mortgages, such loans will not be covered by the extortionate credit controls. However, FSA is expected to apply its own rules on fairness to deal with such issues.