CONSUMER CREDIT

Loan to clear mortgage arrears - lender paying arrears out of moneys borrowed made contemporaneously with completion of consumer credit agreement - agreement enforceable because payment part of credit and not charge for creditWatchtower Investments Ltd v Payne and another: CA (Lords Justice Peter Gibson and Clarke and Mr Justice Maurice Kay): 20 July 2001The claimant made loans to borrowers unable to obtain finance from primary lending sources.

The defendants applied for a loan 'to clear arrears' with a building society.The claimant sent a draft consumer credit agreement and legal charge to be incorporated which was said to be a second mortgage on the property to take effect on the same date as the credit agreement.Clause 8 stated that: 'If this or any other mortgage is in arrears [the claimant] may repay any prior mortgage in part or entirety.

All moneys spent in so doing shall be added to the loan to which this charge relates'.The defendants signed that agreement and on the same day the claimant deducted moneys, which it sent to the building society to clear the defendants' arrears, deducted an amount for an insurance premium for its brokers and sent the balance to the defendants.The claimant brought proceedings when the defendants defaulted on repayments.

The judge declared that the payment was a charge for credit and the agreement and legal charge were unenforcable.

The claimant appealed.Frederick Philpott and David Giles (instructed by Sherringtons, Edgware) for the claimant.

Tristram Hodgkinson (instructed by Hudgell & Partners) for the defendants.Held, allowing the appeal, that when assessing the effect of a consumer credit agreement for the purposes of section 20 of the Consumer Credit Act 1974 and regulation 4 of the Consumer Credit (Total Charge for Credit) Regulations 1980 to decide whether an item formed part of the total charge for credit or formed part of the credit itself, the court had to consider all the circumstances including the documents relating to the agreement and might have to ascertain objectively the purpose of the borrowing; that the total charge for credit was the true cost to the debtor of the credit and the question to be asked was whether the item could fairly and in reality be regarded as part of the true cost of the credit; that where the objective purpose of the loan was to repay arrears and it was a requirement of the credit agreement that repayment of prior mortgage arrears be made otherwise the agreement could not be completed, payment of those arrears made contemporaneously with completion of the agreement out of the moneys borrowed was part of the credit and not a charge for the credit; that, accordingly, the agreement was enforceable.