Net closes on rogue lenders with plan for 'fairness' test

The Department of Trade and Industry paved the way yesterday for rogue lenders to be pursued by borrowers who believe their existing loan agreement is unfair.

The Government published a White Paper last December - "Fair, Clear and Competitive - the Consumer Credit Market in the 21st Century" - that envisaged a Bill to introduce a new test of a loan's fairness. The White Paper stated: "We are considering the extent to which our proposals should apply to existing credit agreements."

"The Bill will set a date when it will become effective," a DTI spokeswoman said. "From that date borrowers will be able to challenge an existing agreement in respect of money still to be paid." It is expected to start in at least 18 months.

Courts can already re-open an agreement that is deemed to be grossly exorbitant or unfair, but only 30 such cases have reached court and 10 have been declared unfair. The Government says these provisions need to be replaced by a test that would make it easier to challenge agreements. The aim is to widen the scope of theconcept of "extortionate", to encompass unfair practices and unreasonably high interest rates.

The "fairness" test will consider the lender's honesty, openness and transparency; whether the lender disclosed material information on an ongoing basis; and whether the lender honoured guarantees made to the consumer, or acted impartially and reasonably. Integrity, good faith, competence and diligence will also be examined, and whether the lender behaved capriciously or exploited the borrower.

The courts will be asked to determine whether the interest "substantially exceeds" market levels. But expensive interest is not enough to render an agreement invalid - such cases would be assessed individually.