Turning screw on poor

Controversial home loans group City Mortgage Corporation is still treating some borrowers harshly despite a 1998 agreement with the Office of Fair Trading to remove unfair penalties from its loan contracts.

The group, which specialised in loans to those with credit rating difficulties, faced customer anger over high interest rates and "fines" when a payment was late. This followed the setting up of a high-profile customer protest group, the National Association of Mortgage Victims, which has attracted some 1,500 members.

Subsequently a complicated chain of transactions led to a management buyout of the company, now called Igroup. Although Igroup, 49% owned by Royal Bank of Scotland following the management buyout, is still supposedly subject to that undertaking, the case of Trevor and Susan Reeves, who live in Suffolk, highlights the way the company continues to treat many of its poorer borrowers.

In 1989 the Reeves borrowed £6,000 from Homestead Financing, subsequently taken over by CMC. This was a mortgage secured against their house. They got into difficulties, but in 1995 thought they had reached agreement. Mr Reeves, who has worked in horse racing all his life, arranged to pay back £200 per month over 17 months to cover the arrears and regular payments. These payments, made directly from the Reeves' wages, brought the total paid under the agreement to nearly £14,000. After all the money had been paid CMC claimed that the Reeves owed another £19,000.

Reluctantly, the Reeves continued making payments, but the sum claimed grew to £25,000 by July 1999. They stopped paying and CMC tried to get possession of their home. When the case was heard in November 1999, the judge said he had "considerable disquiet" about the claim and adjourned for the Reeves to seek legal advice. The Racing Post newspaper took up their case and the company said that it is "reviewing the case". The company's claim seems to have grown as a consequence of increases in interest rates it charged under the mortgage - which bore no relation to base rates. These reached nearly 20% at a time when most lenders were charging around 7%.

Had the Reeves' mortgage been granted after July 1995, CMC's shenanigans would almost certainly have fallen foul of the Unfair Terms in Consumer Contracts Regulations. If the company does pursue the case, it could well fall foul of the Consumer Credit Act 1974 which makes "extortionate credit agreements" unenforceable. This argument has led to claims brought by J&J Securities, a company run by David Johnson who has been involved with CMC and Igroup, being thrown out of court when they sought to recover even higher rates of interest. Despite the continuing involvement of Mr Johnson, a spokesman insisted Igroup is a completely separate business.

CMC specialised in non-status loans, on which lenders quite properly charge a higher rate of interest because the chances of default are higher. However, where the rates approach three times the normal figure and the loan is secured anyway, this justification is unlikely to be accepted. The company also relies on terms that supposedly entitle it to levy charges whenever borrowers fall into arrears.

Almost all mortgage agreements enable lenders to recover legitimate expenses, particularly legal fees. However, where the fees amount to a punishment for being in arrears, rather than a genuine appraisal of costs, they are regarded as penalty clauses, which are not recoverable. Many of the sums added to the Reeves' account are completely indefensible. A sum of £95 is charged for swearing an affidavit, while the usual fee is around £5, and £157 is added for a meaningless, "account assessment". These, a spokesman claimed, were acceptable because the companies "operate a policy of complete transparency". This seems to mean making charges, however outrageous, is acceptable if they were expressed in the mortgage agreement even though most borrowers would not read, let alone understand it.

In the Reeves' case the 1995 repayment agreement will probably see off CMC should it pursue the case any further. If the company insists on levying outrageous charges against borrowers who have not entered into a specific repayment agreement, it will take a test case to check their validity. Those facing such claims should contact RBS's Edinburgh head office as it may have a moderating influence.

National Association of Mortgage Victims (01889-507394).

• Richard Colbey is a barrister