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CHAPTER 6

THE COST OF CREDIT

6.5.3The Absence of an Informed and Voluntary Consent
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Previously, in 4.10.8 (a), we flagged that the failure by First National / Irish Life to indicate the APR on their Mortgage Quotation colludes with their failure to bring to our attention and explain the fact that the term ‘% p.a.’ has two different meanings within the context of their Endowment Mortgage Contract. We also presented argument as to why the interpretation of ‘% per annum’ should be applied contra proferentem, i.e. against First National and to benefit the borrower.


The meaning of the term ‘% per annum’ in the context of the assumed growth rate of 10.75% per annum for the Endowment Mortgage Fund was the Annual Percentage Rate (APR), while its meaning in the context of the interest rate of 11.85% per annum as applied to their Mortgage Loan was not.


We therefore contended that it could be argued that First National should be limited to compounding the interest charged on their Mortgage Loan as though the 11.85% per annum interest rate quoted was in fact the APR.
Based on monthly compounding of Mortgage Interest, an APR of 11.85% would be equivalent to a Quoted Interest Rate of 11.25% p.a. on the Mortgage Loan.


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We now see, from Section 6.3, that a Quoted Mortgage Interest Rate of 11.85% p.a. can either mean a 12.749% APR or a 12.515% APR, depending on whether the interest is compounded annually or monthly.


In application of the ‘Contra Proferentem Rule’ to such instance (notwithstanding the previous argument that the 11.85% p.a. interest rate quoted in the context of the Endowment Mortgage Loan should itself be interpreted as the APR), First National should, at the very least, be limited to compounding their interest charge on a monthly basis.




By omitting a statement of the APR from their Mortgage Quotation, First National were able to obscure the manner in which they charged interest on their Mortgage Loan.


But, as we have shown in Section 6.4, there can be a further marked difference for the borrower (other than the issue of the ‘total cost of credit’) between a loan where the interest is compounded annually and a loan where the interest is compounded monthly.


This marked difference manifests itself in the FACT that, where a Financial Institution compounds its interest charge annually, it generally computes the Interest Due charge for each month throughout the year (i.e. the annual Interest Due divided by 12) on the basis of the full Amount Outstanding on the borrower’s Loan Account at the start of the year.


This material FACT can have a seriously detrimental effect on the borrower’s financial position.
(See the comparison of situations for Couple A and Couple B in Section 6.4.)


(a)


Where, subsequent to repayment by the borrower of a lump sum against the Mortgage Loan Outstanding, a Financial Institution (as part of its interest charging policy) does not reduce the amount of Interest charged until the end of the year (i.e. they continue to charge interest on the full amount of the Loan Outstanding at the start of the year, as instanced in Illustration 4 for Couple A in Section 6.4 above), such an action by them effectively becomes an applied term of the Contract between them and the borrower.


Such a term can only have contractual validity if it exists, within the terms of the Contract between the borrower and the Financial Institution, as a term subordinate to the principal agreement between them; it cannot be introduced post-contract by the Financial Institution on the basis that it is part of their interest charging policy.


(b)


IF
a term exists within the Contract between the borrower and the Financial Institution that limits the effect of a lump sum payment by the borrower against the Mortgage Loan Outstanding, by exempting the Financial Institution from reducing the interest charged until the end of the year (i.e. they continue to charge interest on the full amount of the Loan Outstanding at the start of the year, as instanced in Illustration 4 for Couple A in Section 6.4 above), —— THEN such a term constitutes an exemption clause within the Contract. Such a term can result in a great hardship being imposed on the borrower; this is clearly evident from the comparison between Illustration 4 and Illustration 5 in Section 6.4 above.

(i)

In the general course of events the contract document that sets out the terms of a Mortgage Contract is merely delivered to the borrower; it is not signed by him. In order that such a term (limiting clause) should become binding as part of the Contract between the borrower and the Financial Institution, it must have been brought to the borrower’s attention before or at the time the contract was made. The Financial Institution would be burdened with providing objective proof that such was the case.

(See Section 2.2.2: The Exemption Clause.)

(ii)

A Mortgage Contract is also a Standard Form Contract. The Financial Institution would therefore (notwithstanding the presence of signature) be burdened with showing that such an exemption clause within the Contract was fairly brought to the attention of the borrower and explained, prior to or at the time of contract, before it would be given contractual effect.

(See Section 2.2.3: The Standard Form Contract.)


(c)


The party putting forward a contract document (i.e. the proferens) prudently sets out, within its terms, subsidiary clauses to cover the various eventualities which, he knows from his experience, are likely to occur throughout the course of the contract.


The circumstance whereby a borrower will pay off a lump sum against the Amount Outstanding on his Mortgage Loan is a very likely eventuality indeed.

The circumstance, whereby the borrower will pay off his Mortgage Loan entirely (i.e. redeem the Mortgage) before the end of the Mortgage Term, is also a very likely eventuality.

So too is the circumstance whereby the borrower / investor will encash (exit) his Endowment Policy or Life Assurance Policy before it reaches maturity.


These eventualities, and the likelihood of same, are facts well known to the Financial Institution.


If the Financial Institution wishes to impose onerous conditions on the borrower / investor should such circumstances unfold then it must do so within the terms of the Contract (and such a limiting condition must itself be capable of being determined).


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Also, as we have already shown in (b) above, onerous conditions linked to such eventualities must, by reason of their ‘exemption clause’ nature, be brought to the attention of the borrower and explained prior to or at the time of contract, before they can be given contractual effect.


Thus, IF a term of the Contract imposes (or gives the Financial Institution or one of its functionaries the discretionary power to impose) a ‘redemption penalty’ on the borrower if he pays off the Mortgage Loan before the end of the Mortgage Term, or an ‘exit penalty’ on the borrower / investor if he encashes his Endowment Policy or Life Assurance Policy before it reaches maturity, —— THEN such a limiting clause must have been fairly brought to his attention before it can be enforced.


This will also be the case where a Financial Institution imposes an additional or ‘surcharge’ interest (i.e. a penal interest over and above the loan interest rate) when the borrower is late with repayments.


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BUT, if it is a fact known to the Financial Institution (the terms of the Contract notwithstanding) that a burden will be imposed on the borrower / investor should such circumstances unfold, then such a fact is very much material to a reasoned decision by the borrower / investor as to whether or not to enter into a Contract with that Financial Institution.


If, as is generally the case, a fiduciary relationship or a special relationship exists between the Financial Institution and the borrower / investor, then the Financial Institution must make a full disclosure of such a material fact. This duty of disclosure may also be statutory, as under the Principles of Disclosure as defined under Schedule 8 of the U.K. Financial Services Act 1986, or may flow from the acknowledged Utmost Good Faith nature of the contract.


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Note! With regard to the burdens imposed on the borrower / investor, as cited above, the fact that many competitor Financial Institutions do not impose such burdens on the borrower / investor effectively becomes their (such burdens’) ‘Reasonableness Test’ (see ‘Guidelines’ for Application of the Reasonableness Test in Section 2.2.4 (c)). This further reinforces the material nature of such facts and the importance of the disclosure of same.


(See Section 2.3.4 (a): The Duty to Disclose and Silence as a Misrepresentation — Where a Fiduciary Relationship or a Special Relationship exists. See also Section 2.8.1: The Right to Revoke the Contract, and Section 2.8.3: The Measure of Damages as a result of a successful Action based on the Common Law liability under Negligent Misrepresentation.)


 

NOTE !

Again the non-disclosure of the material facts, as outlined above, must be seen in light of First National's certain knowledge of their significant consequences for the borrower. First National's non-disclosure of these material facts must therefore be seen as a deliberate act, where the non-disclosure takes on the mantle of a fraudulent, and not just negligent, misrepresentation.

(See Conlon v Simms in Section 2.3.4 (a): The Duty to Disclose and Silence as a Misrepresentation — Where a Fiduciary Relationship or a Special Relationship exists. See also Section 2.3.2: Fraudulent Misrepresentation and Section 2.8.2: The Measure of Damages as a result of a successful Action based on the Common Law liability under Fraudulent Misrepresentation.)

 

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