Bank of Scotland has been unfairly double-billing customers who fell behind on their mortgages, a High Court judge has ruled.
Master Ellison said the bank's behaviour had been unconscionable.
His finding in a Belfast courtroom could have implications for thousands of mortgage holders across the UK, the charity which took the case said.
Master Ellison said: "The plaintiffs' reliance on extinguished arrears may fairly be described as double-billing. Unilateral consolidation with double billing creates very real problems for borrowers, their advisers and the court.
"To the extent at least of the double billing, it is unconscionable."
The Housing Rights Service which supports distressed borrowers challenged how the lender was dealing with mortgage arrears, in conjunction with three customers facing repossession.
The bank had added their arrears to outstanding mortgage balances without the customers' consent.
This produced increased mortgage payments, meaning customers were effectively paying off their arrears.
The bank then proceeded with legal action to repossess the properties and asked the customers to make additional payments towards the arrears to avoid losing their homes.
Master Ellison said: "The plaintiff is, as it were, having its cake and eating it. There may not be fraud involved, but I would certainly not regard this as fair accounting."
Housing Rights Service uncovered the issue when a number of customers contacted its mortgage debt advice service. Advisers notice a pattern of unexplained increases in mortgage payments despite there being no rise in the bank's interest rates.
The court stated that the capitalisation of the arrears by adding them to customers' bills resulted in them being extinguished and as such it should not be permissible to rely on such arrears to justify repossession legal proceedings.
It found that the practice of Bank of Scotland distorted the borrowers' perception of affordability. That was because they faced increased monthly payments reflecting the arrears plus a demand for immediate payment of the arrears.
The judge said this made it impossible for the court to define or ascertain the period within which any payment proposal by borrowers would clear the arrears.
"The plaintiffs' stance is one of extremely select subjectivity. It has somehow turned a tool of forbearance into its opposite."
He said he was imposing a series of strict conditions on the bank if it tried to enforce any suspended repossession orders.
He added that if the bank failed to meet these conditions, it "may face an uphill struggle".
Christopher McGrath, solicitor with the Housing Rights Service, said the law provides protection to borrowers by allowing the court discretion to stop repossession action when a borrower can put forward a payment arrangement.
He added: "However the actions of Bank of Scotland distorted this discretion.
"It is our view that this practice unfettered would undoubtedly have resulted in many borrowers unnecessarily losing their homes."
Bank of Scotland is a subsidiary of the Lloyds Banking Group.
A Lloyds Banking Group spokeswoman said: "We encourage customers to contact us at the earliest opportunity if they believe that they will be unable to make their monthly mortgage payment.
"Repossession is always the last resort and we work hard to ensure that we are providing customers facing financial difficulty with the right support to help ease their circumstances and ultimately help to resolve the situation.
"We are currently considering the Northern Ireland High Court judgment made on 4th August and our position following that judgment.
"Once we have fully reviewed the findings, we will respond accordingly."
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article