No Requirement to Issue New Demand Letter Following Transfer of Loan
Earlier this year the High Court held that there was no requirement for a new demand letter to be issued by a transferor to a borrower following the transfer of a loan

 

In The Governor and Company of the Bank of Ireland v Patrick McMahon and Angela McMahon [2018] IEHC 455 (the "Proceedings") the High Court confirmed a Circuit Court order for possession of the appellants' family home. 

Patrick McMahon and Angela McMahon's (the "Appellants") obtained a mortgage from ICS Building Society ("ICS") in 2006. The Appellants granted security over their family home by way of a mortgage and subsequently fell into arrears.  A demand letter was issued by ICS to the Appellants on 14 August 2014, just before the transfer of the Appellants' loan by ICS to The Governor and Company of the Bank of Ireland ("BOI"). 

The Appellant sought to overturn the decision of the Circuit Court based on a number of grounds, each of which was rejected by the High Court.

Loan Transfer

The Appellants argued that upon the transfer of the loan from ICS to BOI, BOI should have issued a new demand letter and could not rely on the letter issued by ICS. BOI submitted that Section 34 of the Central Bank Act 1971 provided that following a transfer, under a scheme of transfer, the transferee takes over all the rights and obligations of the transferor.

Mr Justice Binchy in the High Court agreed, noting that Section 34 was "clear in its intent, meaning and effect" such that BOI was entitled to rely upon the demand letter previously issued by ICS.

Unfair Terms in Consumer Contracts 

The Appellants claimed that certain terms of the loan agreement and mortgage were unfair and in breach of Council Directive 93/13/EEC on unfair terms in consumer contracts as implemented by the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995 (the "Regulations") in Ireland. 

In particular, the Appellants argued that the terms of the mortgage whereby they gave advance consent to any transfer of their loans was unfair and that the Court was required to assess the fairness of the mortgage.  The Court noted that the Appellants were clearly advised to take independent legal advice before signing the agreement and that the mortgage warned the Appellants that their home was at risk if they failed to keep up payments. 

Mr Justice Binchy concluded that there were no unfair terms in the mortgage.

Mortgage Deed Language

Additionally, it was argued that the loan agreement was unfair and in breach of the Regulations on the basis that many provisions were not written in plain and intelligible language. The Appellants quoted extensively from the deed of mortgage in this regard and submitted that the mortgage formed part of the loan agreement and constituted a breach of the Regulations as a consequence. 

Mr Justice Binchy accepted that a mortgage was a complex legal document that may not be easily understood by a person without legal training. However, Mr Justice Binchy did not accept that the obligation in the Regulations to provide a contract in plain and intelligible language extended to a deed of mortgage completed pursuant to the requirements of a loan agreement and that if it did it could "undermine the domestic loan market". Mr Justice Binchy noted that a loan agreement must be written in a plain and intelligible manner. Further, the Court noted that the Appellants (and all borrowers in the process of drawing down a mortgage) were required to instruct a solicitor and clearly would have received independent legal advice as to the content and consequences of entering into the loan agreement, as well as the legal effect of the mortgage documentation generally.

Breaches of Voluntary Codes of Practice

Finally, the Appellants argued that the failure on behalf of BOI to comply with the Central Bank Code of Practice on the Transfer of Mortgages and the Code of Conduct on Mortgage Arrears rendered the transfer of the loan invalid. Mr Justice Binchy accepted that BOI had not complied with the requirements of either voluntary code, but rejected the argument that this prevented BOI from enforcing its security. The court stated that it was "well settled that non-compliance with a voluntary code … does not afford a borrower any relief against an application for judgment, or for possession arising out of default", and that the Appellants' only recourse in this regard would be to lodge a complaint with the Central Bank of Ireland. 

The Appellants' contention that a Civil Bill for possession was contrary to Article 6 of the European Convention on Human Rights as well as various provisions of the European Charter of Fundamental Rights was also rejected by the High Court. The appeal was dismissed. 

Key Points for Lenders

This case provides the following helpful clarification to lenders and acquirers of loan portfolios:

  1. a party acquiring a loan is not required to reissue a demand letter following the acquisition of a loan (provided all other formalities in connection with the transfer of the loan have been completed);
  2. the Regulations do not extend to the language of mortgage documentation, but the loan offer letter must be in plain and intelligible language; and
  3. a lender's failure to comply with voluntary Central Bank of Ireland codes will not render its security unenforceable or invalid. 

Contributed by Rebecca O'Connor

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