Logbook Loans – The Empire Strikes Back
Tom Maple, partner in the Dispute Resolution team, takes a closer look at the review of the Bills of Sale Acts, with a particular focus on Logbook Loans, and the Law Commissions proposals for reform.
The Victorian Empire gave us many great things: the pneumatic tyre, the pedal bicycle and steel. It also gave us some less useful things like the Bills of Sale Acts 1878 & 1882. Nearly 140 years later, and prompted by a great deal of press criticism about logbook loans, the Empire is striking back.
A Bill of Sale is a method by which individuals use goods they already own as security for a loan whilst keeping the goods in question. A modern example of this is the “logbook loan”.
The Logbook Loan
A logbook loan is a sub-prime loan secured on a vehicle where the owner/ borrower transfers ownership of the vehicle to the logbook lender. The owner keeps possession of the vehicle but gives the V5C Logbook to the lender as part of the transaction. In actual fact, the handing over of the logbook is purely symbolic and has no legal effect – The legal protection for the lender is produced by the “bill of sale” document. The bill of sale must be registered at the High Court – A cumbersome process which takes up a great deal of time and money. [According to the Law Commission, the costs to logbook lenders of registration at the High Court in accordance with a cumbersome and expensive regime is circa £2 million per year (some of which will be passed on to borrowers)].
Registration of the Bill of Sale
The registration system was introduced to enable third parties to check if the goods they were about to acquire/ secure were already subject to another bill of sale. However, it doesn’t work and the High Court register is so difficult to search that very few people bother. [The High Court registers the bill of sale against the borrower, not the vehicle. Therefore, to search the register, the “purchaser” needs the name and postcode of the borrower, and then must pay a £50 fee. The Law Commission reported that even logbook lenders do not check the High Court register before agreeing a logbook loan, it is that cumbersome and problematic].
If a lender fails to register its security, or fails to ensure that the wording follows the strict requirement of the Acts, then the logbook loan is unenforceable.
The Stark Reality for Borrowers and Purchasers
The law is archaic and is not working. Borrowers do not understand what they are signing. Vehicles are seized too readily and dealers and other purchasers are unwittingly buying second hand vehicles which they do not realise are subject to a logbook loan. This often results in the purchaser facing a stark choice:
- Pay off someone else’s logbook loan;
- Pay for the vehicle a second time; or
- Lose the vehicle.
It does not matter if the purchaser acted in good faith and without notice of the logbook loan. Those laws do not apply to logbook loans (they relate to Hire Purchase agreements). The purchaser try and get his money back from the seller, but he or she is likely to be long gone, penniless or both.
Likely Changes to the Law
A number of interested parties, including the lenders, want change. Therefore, The Law Commission has considered how the law should be changed to reflect 21st century business (England & Wales only – Scotland has different rules). As a result of its investigations, the Law Commission has recommended a new “Goods Mortgages Act”.
The key issues which have been addressed are (i) the ease by which logbook lenders can repossess the vehicle and (ii) the registration process.
Proposals regarding Repossession & Registration
The Law Commission has taken its lead from the existing hire purchase legislation. Under hire purchase law, hirers in default have some protection against repossession of goods. For example, where the hirer has paid more than one third of the total hire purchase price, the lender may only seize the goods with a court order. If a private purchaser has purchased in good faith and without notice of the HP agreement, they can keep the vehicle.
These protections do not apply to logbook loans. All lenders need to do before repossessing the vehicle is issue a couple of notices and await the expiry of certain short grace periods. Therefore, the Law Commission has recommended that:
- Borrowers get appropriate protection, so that vehicles cannot be seized too readily;
- Innocent purchasers who buy vehicles without realising that they are subject to a bill of sale are allowed to keep them [this may only apply to private purchasers – we will have to wait and see];
- A new register should be introduced where dealers and other private purchasers alike can easily check if a vehicle has an outstanding logbook loan.
We anticipate that whilst it may not be top of this government’s agenda, these changes will become law in 2017-2018. This is good news for all concerned, including lenders.
If you have purchased a vehicle and later establish that it has an outstanding logbook loan, then it is likely that there is very little you can do. That said, it would be worth checking that:
i. The claimant has the right to demand delivery of the vehicle;
ii. The bill of sale was properly drafted; and
iii. The bill of sale was properly registered within the prescribed time periods.
If that doesn’t help, then it might be worth making further enquiries into the whereabouts of the seller in order to determine if there would be merit in pursuing matters.
This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by Field Seymour Parkes LLP.