Goods Mortgages Bill ready to write off unfair law on logbook loans

The Law Commission has today published a new draft Bill to put the brake on unfair rules on logbook loans and usher in a new era of better protection for consumers.

Logbook loans are a way for borrowers to use their car or van as security for a loan. But if payments are missed, borrowers can face swift repossession.

What’s more, people who buy second hand cars in good faith can unexpectedly find themselves losing the vehicle or having to pay off someone else’s loan.

As a result, the Government asked the Law Commission to bring forward draft legislation to address these problems.

Now, after extensive work with interested groups, the Law Commission has published its final report and draft Bill.

Law Commissioner Stephen Lewis said:

“Logbook loans can be a good source of credit – provided the right consumer protections are in place.

“But the Victorian laws that govern them aren’t working for anyone. Borrowers aren’t protected and lenders have extra costs because of 19th century red tape.

“We’ve consulted widely and lenders and consumer groups agree – the Bills of Sale Acts need writing off.

“Our new Goods Mortgages Bill would consign these outdated laws to the scrapheap.”

From Bills of Sale

Bills of sale, where people can use goods they own as security while retaining possession of those goods, have grown from under 3,000 in 2001 to over 37,000 in 2015.  They are mostly used for logbook loans, a high-cost form of credit regulated by the Financial Conduct Authority.

Research shows that bills of sale are used to secure amounts typically between £100 to £3,500, for a term of between six months and three years. The vast majority are taken out by borrowers who have difficulty accessing other forms of credit.

To Goods Mortgages

In September 2016, the Law Commission recommended a new Goods Mortgages Bill. This would replace bills of sale, making this form of lending fairer for borrowers and purchasers of used goods and more straightforward for lenders.

Our recommendations would also allow for better use of high-value assets, such as art and antiquities, as security.

The Law Commission has now published a draft Bill to allow the speedy implementation of its reform.

During its extensive public consultation and individual engagement with stakeholders, the Law Commission has built wide support on its proposals, including from lenders and consumer groups.

The Bill:

• Repeals the Victorian Bills of Sale Acts and replaces them with a Goods Mortgages Act.
• Ensures borrowers are given adequate warnings at the outset of the agreement.
• Increases protection for borrowers by introducing a new requirement for lenders to obtain a court order before seizing goods. This would occur where the borrower has paid one third of the loan and wants to challenge the intended repossession.
• Allows borrowers to end their agreement by handing back the goods to the lender – instead of paying the rest of the loan.
• Protects buyers of second-hand vehicles – purchasers who unwittingly bought a car with an outstanding logbook loan would not be liable and would keep the car.
• Helps unincorporated businesses raise finance against their assets, by making lending cheaper and more straightforward.

Next steps

In June the Government announced its intention to bring forward reform in this area as part of the Queen’s Speech. The Queen’s Speech sets out the intended legislative programme of government.

The Law Commission has a special procedure which allows uncontroversial bills to be introduced into Parliament.

The procedure is intended to reduce the time that Law Commission bills spend on the floor of the House by providing for certain stages to be carried out in Committee.

This allows Law Commission bills to be considered and scrutinised despite the pressures on Parliamentary time.

Further information

• The Law Commission is a non-political independent body, set up by Parliament in 1965 to keep all the law of England and Wales under review, and to recommend reform where it is needed.
• Since 1965 more than two thirds of its recommendations have been accepted or implemented in whole or part.
• Logbook loans are regulated by the Bills of Sale Act 1878 and the Bills of Sale Act (1878) Amendment Act 1882.
• The Law Commission was asked by HM Treasury in September 2014 to examine the Bills of Sale Acts and consider how they could be reformed.
• Currently, logbook loans represent 90% of bills of sale.