UK: Step Aside, Payday Loans: There's an Old Kid in Town

You could be forgiven for thinking that the Bills of Sale Acts of 1878 and 1882 would have been repealed by now, or could never apply to you, over 130 years after they were drafted. But if you've ever purchased a second-hand car (or, if you're lucky enough to be purchasing works of art or borrowing against your gold coins), you could be wrong.

Bills of sale may be granted by individuals or unincorporated businesses (such as partnerships) as a form of security in relation to moveable goods which the individual or unincorporated business sells, while retaining possession. This is a conditional bill of sale, whereby the borrower may continue to use the sold goods, unlike pawnbroking or pledging where the lender would take possession of the item in question. Hotels use bills of sale to secure financing against their furniture, and individuals or unincorporated businesses can use them to register a general assignment of their book debts.

Originating hundreds of years ago, and becoming popular when the Victorian middle class sought a means to raise funds on the basis of non-land collateral, bills of sale used to be a common form of security granted by individuals and sole traders. Since then, because of their shortcomings, they have not been heavily used until recently (with some exceptions in the case of fine wine, art, gemstones and gold ingots) to secure financing. In the past few years, there has been a marked increase in the use of bills of sale, specifically to gain finance against the security of a vehicle (popularly known as a 'logbook loan').

According to the Law Commission's consultation paper no. 225 (Consultation Paper), 2,840 bills of sale were registered in 2001, rising to 52,483 in 2014. Of these, 47,723 were in relation to logbook loans. Although general assignments of the book debts of an individual or an unincorporated business are also required to be registered as though they were bills of sale, there were only 97 such registrations in the same period. Given the exponential growth in this area, this piece focuses on logbook loans.

You will have seen the adverts, or heard the jingles on the radio. No credit checks! Apply online! Any roadworthy vehicle considered! The part they don't tend to shout about is the APR, which is often 300 per cent or more. Welcome to the world of the logbook loan.

Borrowers looking to raise funds in this way often do so because they are considered to be a poor credit risk and are unable to obtain finance from other sources. The Consultation Paper reveals that many such borrowers do not have enough savings to enable them to maintain repayments if they run into financial difficulties.

How do logbook loans work?

Logbook loans allow borrowers to take out loans, usually secured against a vehicle that they already own (although they can also be used to finance the acquisition of a vehicle, without the legal protections of a hire purchase agreement or a PCP).

What is the problem?

Simply put, there are concerns that the language and practices of the Bills of Sale Acts are out of date and cumbersome and that people don't understand them.

The language of the Acts is archaic and the registration and enforcement processes required for the security created are expensive and no longer fit for purpose. The expense of these requirements is often passed on to borrowers and, unlike the cap of £15 fixed charges which would apply to a payday loan, there is no such cap for logbook loans. The typical costs cited in the Consultation Paper are £300, which are usually added to the borrower's account.

Many of the current problems arise from the outdated registration system, including:

  • A bill of sale must satisfy a list of 12 separate requirements in a standard form set out in the Bills of Sale Act 1882, which must be witnessed and accompanied by a statement (which will later need to be supported by an affidavit) by the witness that the bill of sale has been correctly signed. Failure to comply with these requirements means the lender loses the right to sue the borrower for repayment. Challenges to bills of sale on the grounds of defective paperwork have led many lenders to adhere to the antiquated standard form document, which can be confusing for borrowers.
  • Bills of sale must set out the exact amount to be repaid and break down the repayments due. A further issue therefore arises in relation to, for example, revolving credit facilities supported by a general assignment of book debts – it is simply impossible to state with certainty what the loan amount or repayments will be. Therefore, these borrowers will be precluded from using their goods as security for loans. Given that they are unable to grant floating charges, the problem of raising finance is compounded.
  • Bills of sale must be registered at the High Court, notionally to allow potential purchasers of the asset in question to check whether it is subject to security. The registration fee for a security bill of sale is £25, but the additional cost of having the affidavit of the witness signed in front of a solicitor can exceed that amount. The bill of sale must be registered within seven days of its signature. This deadline is often missed, leading to an additional £50 court fee. Registration must be renewed every five years to maintain protection for the lender. The cost of registering a bill of sale in relation to a general assignment of book debts is much higher, ranging between £480 and £1,735.
  • The industry appears to be in agreement that the register itself is not user-friendly. A bill of sale is registered against the name and postcode of the borrower, not against the asset – and therefore it is difficult (or impossible, if all you have is the details of the number plate) to search the register. The fee to search the register in relation to a vehicle is £45. Perhaps unsurprisingly, the High Court has confirmed searches are rarely carried out in practice.
  • Defaulting on logbook loan repayments entitles a lender to take steps to seize the vehicle in question. Following default, a lender may issue a default notice and must then wait 14 days before starting enforcement action (typically, seizure of the vehicle). Many lenders use enforcement agents to repossess the vehicle, which can be traumatic for all concerned. The lender must wait five days before selling the vehicle, during which time the borrower may apply to court for an order preventing the sale. However, anyone with experience of the court system will appreciate that five days is an insufficient period of time. Assuming the vehicle is then sold, the borrower will remain liable to the lender (and may be sued) for any shortfall in the logbook loan, plus costs and charges.

The Acts do not allow the borrower to surrender the vehicle to the lender in full and final satisfaction of the loan, if they become unable to repay it. However, although this is not a legal right, members of the Consumer Credit Trade Association have agreed to permit borrowers to do this.

Purchasers of vehicles also lack protection. If the borrower sells the vehicle to an unwitting third party (who has either not searched the register or has searched and not found the applicable bill of sale) and then fails to maintain repayments on the loan, the lender can seize the vehicle from the third party. Unappealing remedies for the third party include paying off the logbook loan or purchasing the vehicle from the logbook lender at a discount. This differs from the position under a hire purchase contract, where the law protects innocent third parties.

These concerns, coupled with the boom in logbook loans, led HM Treasury to engage the Law Commission to consider bills of sale, resulting in the Consultation Paper and various proposals for reform.

What are the proposals for reform?

The Law Commission recommends an overhaul of the Bills of Sale Acts. They propose the introduction of the terms 'goods mortgage' (which would apply generally to a security interest over moveable tangible goods) and, in the specific case of a goods mortgage secured on a vehicle, 'vehicle mortgage'.

The key proposals for reform are summarised below:

  • Documentation: the documentation requirements would be streamlined and modernised. Failure to comply with these requirements would mean that lenders would lose any rights to the secured assets (both against the borrower and third parties), but they would remain entitled to repayment of the underlying loan (i.e., they would lose their security). For example, it is suggested that the bill of sale (i.e. the document) would:
    • need to be in plain, modern English and, in the case of a logbook loan or vehicle mortgage, would need to make clear to the borrower that the lender would own the vehicle until the loan was repaid in full and could repossess the vehicle if payments were not maintained;
    • no longer need to set out a fixed amount to be repaid, or the instalments schedule, which would allow better access to finance for unincorporated businesses and individuals in connection with revolving credit facilities, overdrafts and guarantees; and still need to be witnessed, but not require a sworn affidavit from the witness.
  • Registration:
    • In relation to logbook loans, the requirement to register at the High Court would be replaced with a requirement to register the vehicle mortgage at a designated asset finance registry, as is the case for hire purchase agreements (and aircraft). It is proposed that failure to register would mean that the lender could not enforce the vehicle mortgage against a third party purchaser, but would remain entitled to enforce against a borrower. Of course, if the borrower were to disappear, having sold the vehicle to a good faith purchaser, the lender would be left with little recourse.
    • In relation to other goods mortgages where there is no asset registry (for example, fine wine and art), the proposal is to retain the requirement to register at the High Court, but to streamline the process (including electronic filing and searching by email and removing the requirement for an affidavit). Precisely how the streamlined filing system would work is not yet clear, although problems may remain if, for example, there is no centralised register and if the addresses and names of individuals are required to conduct a search.
  • Protection for borrowers: for logbook and other regulated credit loans, another proposal is to require the lender to obtain a court order to allow the lender to enforce its bill of sale, after the borrower has repaid at least one third of the total amount of the loan (including interest and arrangement fees). Certain logbook lenders have objected to this, citing the cost and delay involved in obtaining a court order. The Law Commission's comment regarding cost is that the court fee of £155 (which has been separately consulted upon and is proposed to increase to £255) could be passed on to borrowers if the lender is successful (although note this would not extend to the lender's legal costs), but argue that this cost would be offset by the removal of the general requirement to register all such loans at the High Court.
  • Voluntary termination: another proposal is that borrowers with no realistic prospect of repaying the loan could surrender the goods to the lender at any time and in any condition (save in the case of malicious damage or significant lack of care), in full and final discharge of their loan. This right would be lost from the point at which the lender begins to incur repossession costs.
  • Protection for private purchasers: lenders under goods mortgages would not be able to recover the goods from third party purchasers (with the exception of trade or finance purchasers) unless the lender could prove that the purchaser had acted in bad faith or had notice of the goods mortgage.
  • Proposals to enhance use of vehicle checks: the Law Commission concluded that it was not realistic to expect private purchasers to carry out vehicle provenance and title checks, but recommends that if these became cheaper and more widely known, it could become a requirement that a private purchaser checks with a registry in order to obtain legal protection when acquiring a vehicle.

Comment

The proposed reforms are long overdue. They contain a mixture of provisions and while some benefit lenders, like the removal of the high court registration and associated fee, the focus is understandably on enhancing protections for consumers and third party buyers. It remains to be seen to what extent, and when, the proposals will be implemented.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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