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Securitisation - using an SPV |
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Mr & Mrs Pender have been the owners of their property since 1985. In August 1989 Paragon provided a mortgage to enable them to carry out repair works and renovation.
Mr & Mrs Pender have been the owners of their property since 1985. In August 1989 Paragon provided a mortgage to enable them to carry out repair works and renovation.
Since early 1987, Paragon has been party to a securitisation arrangement, whereby it transfers a portfolio of mortgages to a Special Purposes Vehicle ("SPV"). In return, Paragon receives a sum which is funded by the issue of listed bonds by the SPV which carry an entitlement to interest at a floating rate. Interest payable on the bonds is in turn funded from the income generated by the mortgages transferred.
The borrowers failed to maintain their mortgage payments resulting in Paragon making formal demand in February 1994. Demand was not met and possession proceedings followed. An order for possession was obtained in January 1995 and whilst some payments were made by the borrowers, the arrears continued to increase. As at October 2004 the arrears were in excess of £130,000.
The borrowers applied to set aside the order for possession. The application was dismissed and following various appeals the case came before the Court of Appeal to determine 3 questions:
1) Does Paragon have title to sue in light of the securitisation arrangement?
2) Did Paragon breach an implied obligation not to vary the rates of interest charged improperly or capriciously?
3) Was the legal charge an extortionate credit bargain under the Consumer Credit Act 1974 because Paragon's power to vary the interest rate had been restricted by the securitisation arrangement with the SPV?
These questions were considered and answered. The Court held that Paragon did have title to sue because they remained the legal owner of the charge at the Land Registry. It was not necessary for the SPV to be joined as a party to the proceedings because there was no issue between Paragon and the SPV.
Secondly, whilst the power to vary interest rates was subject to an implied term that it would not be exercised improperly or capriciously, there was no evidence that acted in this way. A commercial lender is free to conduct its business in what it genuinely believes to be its best commercial interests.
Thirdly, there was no evidence that as at the date when the legal charge was granted securitisation arrangements were in place which had the effect of qualifying Paragon's powers to vary interest rates by imposing a minimum rate. The rates actually charged by Paragon did not support the allegation that such rates were exorbitant or that they otherwise contravened ordinary principles of fair dealing.
Learning Point
The conclusion to draw from this case is that a lender which enters into a securitisation arrangement with a SPV does not give up its legal rights under the charge. The lender retains the right to issue proceedings against a borrower. Further, subject to the implied term that a lender will not vary rates of interest improperly or capriciously, that does not mean that lenders cannot, for genuine commercial reasons, adopt a policy of raising interest rates to levels at which a category of borrowers would consider refinancing with another lender.
Paragon Finance PLC -v- Pender [2005]
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September 2005 |
