Goods Mortgages Bill: paving the way for more modern personal lending?

A bill of sale is a way of taking security over personal property owned by individuals, sole traders, partnerships and other unincorporated businesses – they are essentially a mortgage over personal chattels.

They are governed by nineteenth century legislation with outdated ideas of consumer protection.  The Law Commission’s report back in November 2017 recommended that the Bills of Sale Acts should be replaced with a new Goods Mortgages Act.

The current market

Bills of sale are mainly seen in the context of logbook loans (making up 90% of bills of sale). These have become a popular form of lending where the borrower (buying a vehicle) gives the lender a bill of sale over the vehicle, whilst retaining possession of it. This form of lending has been criticised as borrowers are given minimal protection against their vehicles being repossessed.

Private purchasers are also not protected when they buy goods, in good faith, which turn out to be subject to a bill of sale. As a result, someone buying a car that is subject to a logbook loan will face a bleak choice – either paying off somebody else’s loan or giving up the vehicle.

Lenders in bill of sale arrangements are also subject to onerous registration requirements and risk losing all their rights over the secured asset if they make any slip in the registration process.

More protection?

In order to rectify some of the pitfalls in the current regime, the Goods Mortgages Bill aims to ensure that innocent private purchasers are not bound by someone else’s goods mortgage, provided the purchase is made in good faith without actual notice of the mortgage. Lenders will be prevented from repossessing goods too readily and borrowers will also be able to hand back the goods as a way of ending the agreement. This benefits those who may be struggling with repayments.

This increased borrower confidence could make the use of goods mortgages more attractive. Using the new register, lenders will be able to carry out pre-lending checks with a higher degree of certainty.

Other security options

So, logbook loans aside, could the Goods Mortgages Bill also open up new security avenues for other borrowers? Well it will allow for individuals and other unincorporated businesses to create a charge over goods as security, even where the debt is not a fixed term loan. Qualifying goods for these purposes will include most moveable property (but not aircraft or ships).

The Bill also distinguishes between goods mortgages granted by borrowers who are generally in need of more protection (‘non-exempt’ goods mortgages) and those granted by borrowers who are thought to be more sophisticated (‘exempt’ goods mortgages). The exemption allows high net worth individuals who satisfy a financial threshold to use a goods mortgage to secure sums owed under overdrafts and guarantees. This paves the way for arrangements more in keeping with modern commercial practices and makes it much easier for investment assets, such as antiques or artwork, to be used as security.

A simplified regime

The Government’s preferred approach is to establish a single central register for all goods mortgages, regardless of the asset involved. This new register will likely be kept by the High Court. It is proposed that it will be electronic with no time limit for registration and original documents will no longer be required. The register should be much easier to use than the antiquated bills of sale register, producing more reliable search results.