One type of loan, which until recently was considered less common, is a Loan backed by a Guarantee. This means another individual agrees, in the event of a default by the Borrower, to step in and pay the loan upon demand from the Lender.
The Financial Conduct Authority (FCA) regulate the position where the guarantee is given in relation to the obligations of borrowers who are either individuals, partnerships of two or three entities which are not all corporate bodies, or non-incorporated bodies which aren’t partnerships but are also not solely corporate bodies.
It isn't uncommon for these loans to be agreed, for the amounts to be paid and for the Borrower to continue to make all their repayments until the loan has been paid back in full. However, there are instances where the Borrower, for whatever reason, cannot repay instalments to the Lender. It is in this event that the Lender will seek to recover the outstanding sums due to them by calling on the Guarantee.
In January this year, the FCA issued Finalised Guidance (FG17/1) with regard to guarantees granted in those circumstances. In their view, a Lender has three options for recovering debts from a Guarantor. These are as follows.
1. Issuing a Default Notice to the Borrower
This route is the most legally-certain method of obtaining payment under a Guarantee from the Guarantor. It requires the Lender to serve upon the Borrower a Default Notice, in terms of Section 87 of the Consumer Credit Act 1974. This notice should include:
- Details of the nature of the alleged breach - i.e. why the Borrower is in default (usually because they've missed payments);
- Confirmation of what action may be taken to remedy the breach and the date that this action must be taken;
- If the breach cannot be remedied, confirmation of the sum required to be paid as compensation for the breach, and the date before which it is to be paid;
- Details of the consequences of failing to comply with the notice;
- A copy of the current FCA Standard default information sheet.
The Default Notice must be in writing and the dates for remedy or payment must be at least 14 days from the date of service of the notice.
In order for the Lender to call upon a Guarantee, the notice must also be served on any Guarantor. The Lender must allow the 14 day period to elapse without remedy before they can then seek payment from the Guarantor, following which period they may then demand payment from the Guarantor under the Loan, or take payment by way of a continuous payment authority (CPA) or direct debit mandate which has been previously provided. Without serving a copy of the Default Notice on the Guarantor, the Lender will only be able to enforce the Guarantee by obtaining an order to do so from the Courts.
2. Taking Payment from the Guarantor Voluntarily
If, following notification of a breach by the Borrower, the Guarantor voluntarily makes payment, the Lender is within its rights to accept this payment. This type of payment by the Guarantor is not, in the FCA's view, an enforcement of the Guarantee. Rather, provided that the Guarantor is volunteering the payment of its own accord and without any form of compulsion or pressure from the Lender, the payment can be considered to be as if from the Borrower themselves.
The Lender may request the payment from the Guarantor, but as long as it is not considered to be pressurising or forcing the Guarantor to make a payment, if the Guarantor chooses to do so it is still considered voluntary.
3. Pre-Notifying the Guarantor that Payment will be taken
Where there has been a CPA or direct debit mandate, the Lender may also decide that they would rather act on this and remove from the Guarantor's account the amount required to satisfy the loan or the payment remaining. This is a possible course of action and does not require a Default Notice to be served, as the FSA has drawn a distinction between the "enforcement" of a Guarantee compared with the recovery of sums due without formally enforcing it. Rather, the Lender must notify the Guarantor in advance of their intent to take payment under the CPA or direct debit mandate. This notification must be in writing and provide sufficient detail to the Guarantor to allow them to make an informed decision. This detail includes:
- The fact that the Borrower has breached their obligations under the loan agreement, and how they have breached these obligations;
- The amount overdue and the Lender's intention to take this payment from the Guarantor;
- When these payments are likely to be taken from the Guarantor by the Lender; and
- The Guarantor's right to cancel the Lender's authority to take payment, but that doing so would not remove the obligations the Guarantor has agreed to under the Guarantee.
Once the Guarantor has been informed of this intention, they should be given at least five working days to respond to the notice, or cancel the authority of the Lender to take the payment. This gives the Guarantor enough time to react to the notice, and if they do not they are considered to have accepted it and therefore accept the Lender taking payment in accordance with the CPA or direct debit mandate.
Of course, if the Guarantor responds to any pre-notification with their consent to the payment being taken, this will also be sufficient for the Lender to proceed in taking the payment by way of the CPA or direct debit mandate.
Ultimately, these options may, according to the FCA, allow the Lender to recover the debt from the Guarantors with little time and without the requirement to serve formal Default Notice upon the Guarantor. Granted, without pre-notifying the Guarantor of the intent to take funds from them, or service of a Default Notice upon the Borrower and Guarantor, a Lender cannot take funds from the Guarantor without their authorisation. And where a Default Notice is required under the Consumer Credit Act 1974 (CCA), failure to serve one would result in the Borrower or Guarantor having a cause of action against the Lender for breach of the CCA. Not only this, but the FCA has also indicated that they may also consider taking regulatory or disciplinary action against a Lender breaching their obligations under the CCA. As a result, it is clearly within the best interests of the Lender to take the right steps to call upon their guarantees, and for Borrowers and Guarantors to pay close attention to the process.