A recent ruling by the Financial Ombudsman Service - a British regulatory body set up by law to help settle individual disputes between consumers and financial firms - may have set borrowers one point ahead in their ongoing dispute with lenders over unfair lending practices related to disparate standard variable rates (SVRs) for mortgages.

The Financial Ombudsman threw out an appeal made by U.K.-based mortgage lender Halifax in which the company denied that existing borrowers are forced to pay higher rates than those currently offered by the lenders. The FOS has not acted favorably to Halifax in the recent past: late last month the regulatory group ruled that Halifax's capped-rate mortgage should be linked to the lower 5% SVR that is now offered to new customers.

In response to the FOS' stance, some existing customers who were made to pay rates of 5.75% are demanding compensation for excess payment, explained Dresdner Kleinwort Wasserstein. "Given the record level of mortgage activity in the U.K. in 2001, when gross lending by increased 35% from 2000 figures to GBP161.5 billion, lenders obviously tried to attract as much of this as they could," reported Dresdner. "As a consequence, lenders focused on new-borrower business and existing customers seem to have been neglected to an extent."

The repercussions of this for the mortgage market as a whole is not yet clear. Some market participants believe that mortgage lenders will continue to appeal the ruling; furthermore, because the entities are not offering "blanket" compensation, customers might have to individually present their cases to the Ombudsman.

"In the worst-case scenario it will reduce spreads if mortgage lenders have been practicing this dual pricing," said one market source. "But this is not a final ruling and at this point what can proceed is purely hypothetical. So far the claims have been fairly isolated and in past occasions when the court has ruled in favor of the borrower, the lender appeals. Nonetheless, a decline of spreads could potentially affect ratings negatively."

At this early stage it is difficult to predict what scope of the market will be affected but if the decision escalates to the situation in the Italian Usury Laws, it could potentially affect the entire market. "The situation has parallels with the uncertainty surrounding the Italian Usury law seen in the early part of 2001," said analysts at Dresdner..

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