A mortgage firm has been fined £1.12m after failures resulted in hundreds of borrowers suffering losses of £2.3m.
The Financial Services Authority (FSA) said the fine – the first of its kind regarding lending processes – gave a clear warning to the industry.
The watchdog said 684 customers with retention clauses in their contracts lost more than £3,000 on average.
GE Money Home Lending, which paid compensation to those people affected, first identified the problems in 2004.
Margaret Cole, the FSA’s director of enforcement, said that no action was taken to correct the failures at the firm for two years, despite internal recommendations.
“The firm’s failings were serious because a large number of borrowers, including some with impaired or non-standard credit profiles, were put at risk of financial loss,” she said.
GE Money Home Lending, the UK’s 14th largest mortgage lender last year, imposed a clause that withheld part of these customers’ mortgages for six months – typically so they could carry out specific repairs to the property.
It is standard practice among lenders that a small amount of the money due to a borrower when a mortgage is taken out can be held back until work is done to the property.
But the FSA found that the firm did not make it clear to all customers that they would be charged interest on the full amount of the mortgage even though they had not received all of the loan.
After six months, the money that had been held back, along with the accumulated interest, was not always paid to borrowers – and interest was still being charged on it.
When such a mortgage was redeemed, the firm did not always deduct the retention money and interest from the outstanding mortgage loan.
“This resulted in some borrowers overpaying the firm when redeeming their mortgage,” the FSA said.
GE Money Home Lending has reviewed its mortgages, including those given before the FSA started regulating the market in 2004.
It has paid back £7.04m, including compensation, to a total of 5,245 customers in relation to the issue.
Customers took out mortgages directly through GE Money Home Lending, as well as intermediaries such as igroup and First National.
GE Money Home Lending contacted the FSA in November 2006 to report the situation.
A spokesman said that a handful of customers who were due compensation were still being traced.
“We regret the events which led to this situation and, although the number of affected borrowers was small compared to our overall customer base, we sincerely apologise to those who were affected,” said chief executive Colin Shave.
“Since we reported the problem to the FSA, we have worked hard to ensure that customers affected have been fully refunded and compensated.”
“Our customers can be assured that we have taken this matter extremely seriously and have thoroughly reviewed our systems and processes to ensure this could not happen again.”