MPs urge tougher curbs on loans as couple fight case

MPs have urged the government to include tougher consumer protection in plans for a new Consumer Credit Act after a Merseyside couple, who saw a debt of less than £6,000 spiral to £380,000, found themselves in court yesterday fighting to keep their home.

Calls for a cap on "extortionate" interest rates and punitive charges for late payments came from a string of Labour backbenchers, who want new laws to prevent low-income families from falling prey to loan sharks. Liberal Democrat MPs also called for reforms to give consumers greater protection from sharp practices employed by some finance companies.

Tony and Michelle Meadows borrowed £5,750 in 1989 to make improvements to their semi-detached house in Southport. They were already in arrears on their mortgage when they took out their loan, which had an annual percentage rate of 34.9% repayable over 15 years. After Mr Meadows became unemployed they struggled to make repayments. Now they face losing their £200,000 house to pay the debt.

Last year a judge at Liverpool county court said the combination of a high interest rate, legal fees, insurance costs and compound interest made the agreement "extortionate". He prevented London North Securities, which had purchased the debt from the specialist lender Home Loans Northern, from recovering any of the Meadows' assets.

But London North Securities claimed at the court of appeal yesterday that the Meadows understood the nature of the loan and the charges and the credit agreement was legitimate. In particular, the firm claimed the couple knew the loan protection insurance, which cost more than £700, would be added to the loan and interest charged.

If the firm loses, hundreds of other borrowers could use the case as a precedent to escape their debts.

Graham Allen, Labour MP for Nottingham North, said the Department of Trade and Industry should examine the Meadows case carefully before drafting detailed clauses in the bill or risk failing to protect other families caught by similar credit agreements.

The Consumer Credit Bill received its first reading last week. The consumer affairs minister, Gerry Sutcliffe, said the bill must enhance consumer rights and redress, and improve the regulation of consumer credit businesses.