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Local Authority Housing Loans

CHAPTER 2 THE COMPLAINT

The Complaint

Background

The background to the current complaint is that, in 1981, the complainant (Mr X) took out a housing loan, with Meath County Council, in the sum of �2,500, at a fixed interest rate of 12.5% over a period of 15 years. The loan term expired in 1996.

The complainant called to the Council offices in January 1998 and was informed that his account had been paid in full since the 31st March 1996 and that, in the meantime, given he had continued to pay the monthly loan instalments, a credit balance of �683.98 had accumulated on the account.

According to the complainant, he was making repayments on his account by direct debit.

Once the complaint was presented to me, I asked the Council to forward a report on the matter. I asked the Council to include details of the following with its report:

• the loan payment history details,
• details of the annual end-of-year statements which issued to the complainant,
• details of the action the Council proposed to take in view of the alleged loan overpayment and
• whether the Council were now complying with the provisions of the Consumer Credit Act, 1995 in so far as it related to local authorities.

Council's Response

In its reply to my Office, the Council accepted that the monitoring and control systems which were in operation during this time would not stand up to an auditor's inspection. The Council informed me that, in the meantime, it had taken steps to ensure that the circumstances which gave rise to Mr X's complaint would not arise in the future.

The Council informed my Office that it was now complying with the provisions of the Consumer Credit Act, 1995 which came into effect for local authorities on 1 September 1997 and specifies that an annual end of year statement must be issued to all loan borrowers.

My Initial Conclusions

My initial impression of the Council's reply was that its internal Financial Management / Reporting procedures appeared to be somewhat lax.

I took the view that the absence (or at least non implementation) of any formalised internal reporting procedures between the Council's Housing Loan Department (the Section which issued the loan approval) and its Accounts Section (the Section which collected the due instalments) allowed a situation to develop which permitted the overpayment, over a prolonged period, of the loan by the complainant.

I noted that this breakdown of communications between the Accounts Section and the Housing Section, resulted in the Council:

• collecting an additional 22 monthly instalments,
• amounting to �683.98,
• on a fully paid up loan,
• from an Old Age Pensioner,
• for a period of almost two years.

I was conscious that �683.98 represented over 27% of the original loan amount of �2,500.

In the circumstances, I asked the Council to review the case and to consider the question of redress. I also asked the Council to consider liaising directly with the Local Government Computer Services Board with a view to enhancing its internal financial reporting procedures.

Council's Review of the Complaint

The Council agreed to my request.

It acknowledged my concerns about the absence of a formalised internal procedure between its Loan Department and its Accounts Department. The Council indicated, however, that this situation would shortly be addressed by issuing a statement to all borrowers in accordance with Section 130 of the Consumer Credit Act, 1995. This statement would indicate the capital and revenue balance on a loan at the end of each year. In addition the Council informed me that it consulted with the Local Government Computer Services Board with a view to improving and replacing its financial reporting systems which were introduced in the 1980's. Furthermore, the Council agreed to reimburse the complainant's bank charges in relation to the standing orders, on his current account for the 22 months period from 31 March 1996 to the date of the refund.

Having regard to the specific background to the complaint, particularly the fact that the complainant had been paying the Council by standing order rather than by direct debit - as he originally informed me - I accepted that the Council's offer was not unreasonable.

On this particular point, a standing order is an instruction from a customer to his bank to make a regular (often monthly) payment of a fixed amount from his / her account to another specified account. On the other hand a direct debit is an instruction to a bank from a customer to debit his / her account with the amount (fixed or variable) demanded by a named creditor. The broad distinction is that the customer has control of the standing order while the organisation has control over the direct debit transaction. Put simply, a bank will not take instructions from a Council to cancel a standing order which is authorised by a bank's customer. The onus is on the borrower to cancel any standing order.

Notwithstanding this, I asked the Council:

• to identify all other possible overpayments on mature housing loans and
• to indicate what procedures it proposed to adopt to ensure that no other cases emerge in the future.

In response the Council confirmed that it had identified an additional six (6) accounts where loan repayments had continued to be made after the loan Redemption Expiry Date. These sums ranged from �116 to �424 and the earliest redemption date was 1996, i.e. more than two years prior to the current case.

The Council confirmed that these borrowers had since been refunded in full and advised to cancel any standing orders through their banks. Subsequently, following my decision to investigate the problem across local authorities generally, it emerged that there was in fact a total of 217 cases.

Contact with the Department of the Environment and Local Government

Having regard to the fact that the majority of local authorities were using a similar Loan Repayment System, designed by the Local Government Computer Services Board (LGCSB), I took the view that all housing authorities should be notified of my findings by the Department of the Environment and Local Government which has overall responsibility for services provided by local authorities, and that they be instructed:

• to take the appropriate action, if not already being done, to ensure that all overpayments on paid up mature loans are refunded and
• to alert their borrowers to contact their paying bank with instructions to terminate their standing orders.

In response the Department issued a circular letter, dated 6 August 1998, to each housing authority issuing loans. This letter referred to the LGCSB's Housing Loan System which clearly identifies loans where the balance outstanding is paid off in the normal way or where the loan is redeemed early. The Department instructed the relevant local authorities to ensure that a similar facility is available in any other Housing Loan Systems in use. In addition, the Department requested local authorities to:

• identify any cases of overpayments on mature housing loans,
• take appropriate action to ensure that any overpayments on paid up mature loans are refunded,
• where appropriate alert borrowers to contact their paying bank with instructions to terminate their standing orders,
• adopt appropriate procedures to ensure that overpayments of paid up loans do not occur in the future.

Subsequently, on 21 August 1998, I asked the Department to notify my Office of the following:

• the number of identified cases, if any, where overpayments were made on mature housing loans,
• the range (maximum and minimum) of such overpayments,
• the total value of such overpayments, nationally, and
• the above to be identified by each housing authority.

Response from Department

The Department informed me, on 17 September 1998, that, in view of my further letter, copies of the Department's circular letter and my Office's letter were supplied to the Inspector of Audits in order that the Local Government Auditors might check the position at audit.

I considered the Department's response. I was, however, mindful that my role, as Ombudsman, is to act independently and to carry out an objective examination of complaints. I am conscious that it is this independence which gives my Office the public credibility to perform its functions. As Ombudsman, I am empowered to identify instances of maladministration, their causes and, where appropriate, to recommend redress.

In addition, my Office has a role in contributing to the elimination of what may be termed the root causes of many of the complaints encountered. Finally, my Office also has a responsibility to contribute to improving standards of public administration by identifying the underlying causes of maladministration and suggesting improvements. It was with this in mind that, while acknowledging the Department's response, I decided to investigate the matter further.

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