Security given to back a loan
We have a growing number of complaints from Insolvent miss sold Interest Rate Hedging Products (IRHP) victims on the contractual issues between the Mortgagee (bank) and Mortgagor (borrower) in respect to the security given at time of the loan.
Their complaints are based around the fact that the bank insisted they take on an IRHP product, be it conditioned or not, without disclosing any liabilities that could have been associated with the product.
IRHP’s, depending on the type, can have immediate and potential liabilities
Immediate – Mark To Market (MTM). These liabilities are known by the bank at point of sale and represent the ‘second hand’ value of the contract. The next day MTM value will represent the commission taken from the IRHP sale. This commission is often never disclosed to the borrower, so as such not known. Unlike other FCA authorised products the sales, commission earned was often not disclosed by the banks
Potential Liabilities – Contingent and Sanctioned. These liabilities are a two phased approach adopted by the banks for their own internal credit use;
1. Contingent – before sale of an IRHP the bank will approve a contingent liability against the borrower’s asset value. This contingent liability is often not disclosed to the borrower. The bank accounts for it is a ‘soft’ limit
2. Sanctioned – should the market move against the IRHP contract, which of course it mainly did in late 2008 and early 2009, the contract can accumulate a significant MTM and contingent liability and the bank may Sanction the likelihood of contracts liability, expecting it to become real. Making this a ‘hard’ limit in the bank credit department
These liabilities can effectively make the company appear insolvent in the banks eyes
So what is the problem ?
The problem is that if the bank never disclosed the known immediate and potential liabilities of an IRHP contract; be it pre, at time of or post sale (say in Audit request letters), then this can effect what the borrower put forward as security at the time of agreeing the loan.
Security offered up at the time of loan can include property, debentures, personal guarantees, second charges, other assets and even cash but the lender may not have disclosed all liabilities that this security was subject to
So what is the legal stance ? Is this a breach of contract ?
We are working with leading Lawyers and Counsel to investigate the matter further and would welcome any further case examples to email us at email@example.com