Amongst the proposed legislation announced in the recent Queen’s Speech was a new Goods Mortgages Act, which will unravel the legal system relating to the method by which a lender can take security over a borrower’s private non-property assets.

Under the law as it currently stands, a lender, looking to make a secured loan to a borrower who is an individual, sole trader, partnership or other unincorporated business against property other than land, is able to take receipt of a “bill of sale” from the borrower. This is a legal document that conditionally transfers the ownership of that property to the lender, with the ownership reverting to the borrower once the loan has been repaid. The legal regime is contained within the Bills of Sale Act 1878 and the Bills of Sale (Amendment) Act 1882.

Loans secured using bills of sale are now most commonly seen in the context of “log book loans” where borrowers secure finance by transferring the legal ownership of their vehicle to the lender as security. The borrower is able to use the vehicle while the log book loan is in place, and will only regain ownership of the vehicle once the loan has been repaid.

The Bills of Sale Act regime is widely acknowledged to be unfit for 21st century financial arrangements as it imposes a high degree of detailed documentary requirements and requires all bills of sale to be registered with the High Court. Further, it provide very little protection for borrowers, and no protection for those who buy goods subject to a bill of sale such as third parties privately buying second hand cars in good faith only to discover that they are subject to log book loans.

Appetite for a change in the law has also been fuelled by studies which have indicated that there are insufficient safeguards to prevent potentially unfair consumer practices; including the fact that lenders may undertake very limited checks on a potential borrower’s ability to repay the loan, and that bills of sale are often entered into by borrowers without a proper assessment of the market resulting in very unfavourable terms.

The Government will be looking to introduce a Goods Mortgages Act which will repeal the Bills of Sale Act regime and govern the way that individuals use goods as security for loans, whilst retaining possession. Amongst other things, it is envisaged that it will:

  • Provide appropriate protection to borrowers so that they would have more time to pay before their vehicles are repossessed. In particular, a borrower who is temporarily unable to pay but has already repaid more than one third of the loan could stop lenders repossessing the vehicle without a court order.
  • Protect innocent third parties who purchase second-hand vehicles without realising that they are subject to a logbook loan. In this situation, the third party would become the owner of the vehicle and would not be liable for the loan.
  • Save £2 million of costs caused by red tape and unnecessary registration.
  • Remove unnecessary restrictions on secured lending to small businesses.

It is envisaged that the new Act will link into the existing consumer credit regime; in particular, some of the recommended borrower protection would only apply to goods mortgages used to secure a Financial Conduct Authority regulated credit agreement.

The changes to the Bills of Sale Act regime will primarily impact on individuals, partnerships or unincorporated organisations; Companies will continue to have a range of other measures available to them to secure borrowing, such as fixed and floating charges. However, the proposals may well have broader implications for businesses: in particular, the formalities for assigning book debts secured by Bills of Sale will be simplified which will have an impact on those looking to transfer ownership of a business or part of a business secured by these loans. The proposed legislation will also provide a fresh route by which a company director can use personal goods to secure a personal guarantee of company finance.

This is an area which will be of interest to those who are looking to offer or obtain credit for personal or business reasons, or who are looking to acquire or sell a business or part of a business undertaking these types of loan. It is, accordingly, an area that it will be important to keep under review.