The calculations involved are complex, but concern the way monthly apportionments are made (apparently, you sum the number of payments in inverse order as a numerator for the fraction in which the sum of the term is the denominator).

The rule of 78 has long been regarded as unfair by consumer organisations, and the OFT has described it as ‘unfair and oppressive’. It has been outlawed in respect of consumer credit loans since May 2005 but it can still apply in the case of unregulated loans. There does, however, have to be a term in the loan agreement whereby the borrower agrees to the use of the rule of 78 on an early redemption.

Importantly, we now have a reported case in which the High Court has decided that such an agreement fell foul of the Unfair Terms in Consumer Contracts Regs 1999, and was thus void. In that particular case, the loan had been for £105,000, but when the borrower wanted to redeem the mortgage 18 months later, the rule of 78 calculation gave the lender a windfall of £34,000. But, that £34,000 charge has now been held to be unlawful.

Conveyancers should check redemption statements carefully to ensure that the rule of 78 has not been used to calculate the amount due (ie look for early redemption penalties that seem excessive). Check with the client whether any early redemption charges were agreed (and explained). But, what do you do in practice when the mortgaged property is to be sold, and the lender insists on the excessive payment being made? The obvious answer is to pay under protest and then sue to recover the overpayment, but there are alternatives, including issuing proceedings under s91 LPA 1925 to determine the dispute. In practice, of course, the best solution is to get a redemption statement as early as possible (preferably before exchange, in case there are problems). See article on Evans v Cherry Tree (unreported, 13 April 2007, High Court) in [2007] NLJ 317. © Practical Lawyer