In today’s economic climate it is considered standard to borrow money from the bank of Mum and Dad or family members. Often there is little to no interest rate, and parents/family are happy to have lower repayments over an extended period of time. Why go through the stress of speaking to mortgage advisors when Mum and Dad or family can fix it?!
Well, this article might change your mind.
If you are borrowing money to fund a house purchase, house renovations or for children’s school fees be wary as your loan is likely to be regulated under the Consumer Credit Act 1974 (“CCA”). When we think of the CCA, we often think of it as being applicable to interactions with businesses or even loans to finance / support a business venture. However, what many people are not aware of is that the CCA also covers ‘non-commercial’ consumer credit agreements.
What is a consumer credit agreement?
s.8(1) CCA defines a consumer credit agreement as an agreement between an individual (“the debtor”) and any other person (“the creditor”) by which the creditor provides the debtor with credit of any amount.
Accordingly, a loan from parents to a child satisfies the definition of a consumer credit agreement. So, why is this important? Well, if a loan is governed by the CCA there are strict criteria and regulations that apply to the agreement. Indeed in some circumstances, it could even be the case that authorisation is required from the Financial Conduct Authority before the loan can be given to the debtor.
S.189(1) CCA states that a non-commercial agreement is “a consumer credit agreement…not made by the creditor…in the course of a business carried on by him”. A family loan could therefore fall within this definition.
If your loan falls within this definition, you will not require authorisation from the Financial Conduct Authority, nor will certain parts of the CCA be applicable to your loan agreement, for example you will not be required to follow the strict drafting requirements in relation to the loan agreement.
Indeed, it is likely that any loan will need to comply Part 2 Consumer Rights Act 2015 meaning that the terms will need to be “fair”.
So, when will the CCA apply?
The governance of the CCA is felt most when dealing with loan agreements that have gone ‘wrong’. Examples of where a loan agreement might go wrong is if one party is refusing to repay the loan or is claiming that the loan was a ‘gift’ and therefore does not require repayment.
Under the CCA, a claim to enforce the loan agreement and demand repayment will need to be brought in the County Court with all parties included within the application. Furthermore, there are defences that are available to the debtor that are specific purely to the CCA.
A debtor is able to claim an order for relief either under s.140B CCA or a time order under s.129 CCA.
Under s.140B CCA, a debtor can argue that there has been an unfair relationship between the parties. An unfair relationship arises where the agreement is classified as unfair to the debtor because one of the following applies:
- a term of the agreement or a related agreement contains unfair terms to the debtor;
- the creditor has exercised or enforced their rights unfairly under either the agreement or a related agreement;
- an event or ‘thing done (or not done)’ by the creditor either before or after the making of the agreement or a related agreement is unfair to the debtor.
If an unfair relationship is pleaded and accepted by the court, this could have catastrophic consequences for the creditor. A court could require the creditor to pay back to the debtor any sums of money that the debtor has paid. Consequently, the loan could essentially be turned into a gift. Please bear in mind that the debtor in a family loan might consider there to be an ‘unfair relationship’ between the parties as they might feel like they have no choice but to enter into the loan. This defence is a highly personal one and whether it can be pleaded will be specific to the circumstances surrounding each family loan.
Alternatively, a debtor could plead for a time order under s.129 CCA. If a court accepts this plea, then the court will implement a repayment structure where the debtor will repay to the creditor a sum ‘by such instalments, payable at such times, as the court, having regard to the means of the debtor….considers reasonable’. There is therefore scope under a time order, for the debtor to repay minimal sums to the creditor over an extended period of time. This could result in the creditor never receiving back the full loan amount.
Accordingly, whilst a loan from the bank of Mum and Dad or family members might seem great in theory, in practice if a relationship turns sour it might become impossible for Mum and Dad or family members to reclaim their money.
If you’re thinking of entering into a loan agreement with a family member, or if you are concerned that your loan may not be enforceable then you should seek legal advice. Contact our Commercial Disputes team for more information.