What is a consumer credit agreement?

The current generation of hopeful first-time buyers are finding home ownership climbing further and further out of reach. After a bit of a wobble through Brexit, COVID-19, a disastrous budget and the highest base rates in 15 years, the market seems to be stabilising, and house prices are back on the rise.

For those privileged enough to have family and friends who are able and willing to help, the only viable way onto the property ladder seems to be a loan from the 'bank of mum and dad'.

It seems like a great idea, with little or no interest to pay and smaller payments over an extended period. However, borrowing money for a house purchase, renovations, or even for children's school fees is likely to be regulated by the Consumer Credit Act 1974, or "CCA", even though the loan is non-commercial.

Does my loan fall under the consumer credit agreement act?

Part II, Section 8 of the Act gives the definition: "A consumer credit agreement is an agreement between an individual ( “the debtor”) and any other person ( “the creditor”) by which the creditor provides the debtor with credit of any amount."

The agreement is regulated by the Act if it:

• a"is a regulated credit agreement for the purposes of Chapter 14A of Part 2 of the Regulated Activities Order; and
• bif entered into on or after 21st March 2016, is not an agreement the purpose of which is the acquisition or retention, by an individual acting for purposes outside those of any trade, business or profession carried on by the individual, of property rights in land or in an existing or projected building."

This means that a family loan satisfies the definition of a consumer credit agreement. If your loan is governed by the Act, then strict criteria and regulations apply. In some cases, you may need authorisation from the Financial Conduct Authority (FCA) before you can receive the funds.

Part XII, Section 189 of the Act states: “non-commercial agreement” means a consumer credit agreement or a consumer hire agreement not made by the creditor or owner in the course of a business carried on by him;

If the loan falls within this definition, then only certain parts of the Act will apply, and you will not need authorisation from the FCA. Your loan will still be covered by Part 2 of the Consumer Rights Act 2015, which governs 'fair' terms.

How does the Consumer Credit Act affect my loan?

The Act usually comes into play when something goes wrong; for example, when the borrower isn't paying the lender back or is trying to claim the loan was a gift in the first place.

If you (the creditor) need to enforce a loan under the Act, you'll have to bring a claim to the county court with all parties included. The debtor (borrower) has specific defences under the Act:

A debtor can claim relief under Section 140B: Unfair Relationship

The agreement may be classed as unfair to the debtor if:

• the terms themselves are unfair;
• the creditor has exercised their rights unfairly;
• the creditor has done (or not done) something to the debtor which is unfair, before or after making the agreement;

For example, a family loan may be considered unfair if family pressures made the parties feel like they had no choice.

If the court accepts an unfair relationship claim, they can turn the loan into a gift, forcing the creditor to give back any repayments the debtor has already made.

A debtor can claim relief under Section 129: Time Order

This gives the court powers to implement a 'reasonable' payment structure. This could mean the repayments are very small and spread out over such a long period of time that the creditor never gets all their money back.