A ruling by the financial ombudsman in favour of a retired Glasgow couple has sent a warning shot to lenders who may target older people for loans secured against their homes, a leading lawyer has said.
Black Horse, a division of Lloyds, was told by the Financial Ombudsman Service to restructure its loan and scrap the interest after the Financial Ombudsman Service (FOS) ruled that the lender had failed to check properly whether a 63-year-old man could expect to sustain the same income for the next 10 years.
Mike Dailly, principal solicitor at Govan Law Centre, said: "We think other consumers can use the reasoning underpinning this decision, because there is a worrying practice across the UK of some lenders targeting 'equity rich, income poor' customers, whereby unaffordable loans are secured on the value in the consumers' homes."
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Mr Dailly, also a member of the Financial Services Consumer Panel, said the FOS ruling makes it clear that UK lenders have to undertake proper affordability checks and lend responsibly, taking into consideration the customer's income now and, if close to retirement, any drop in income at that time.
The couple had been advised to refinance and consolidate their secured and unsecured loans with Black Horse over 10 years, secured against their home at an interest rate of around 15%, hiking repayments from £200 to £500 a month. They quickly got into financial difficulties when ill-health prevented both from working, and approached Govan Law Centre when they were threatened with repossession.
According to the ombudsman, "it would have been reasonable for Black Horse to ask when Mr B was going to retire and what his income would have been. The loan was always going to be unaffordable once Mr B retired".
Black Horse had disputed the finding, on the grounds that Mr B had been self-employed and intending to continue working past formal retirement age.
A spokesperson for Black Horse said: "When Mr and Mrs B took out their loan with Black Horse, we discussed whether they could afford the loan repayments over the full 10-year period, in line with our commitment to responsible lending. We conducted a full financial review which included a thorough assessment of their income and expenditure to ensure that the loan and repayment figure was appropriate. Our records do not show that Mr B indicated that he intended to retire shortly after taking out the loan and as a self employed individual no forced retirement age exists that would have led us to believe that he was planning to retire."
The ombudsman had acknowledged that "Black Horse had taken steps to treat Mr and Mrs B fairly" by already accepting reduced payments and refunding previous interest payments.