Finance has long played an important part in driving vehicles out of the showroom and onto the tarmac. So, could proposed Law Commission reforms on how individuals can use cars as security for loans and other obligations inject further life into the automotive sector and to those who provide finance within it?
Older than the first Benz
The current law on how individuals can create security for loans pre-dates the first two seater motor vehicle completed by Carl Benz in 1885. So, it is little wonder that existing 'Bills of Sale' legislation is widely seen as out of date and due for a much needed overhaul. For the automotive sector, the two aspects of the existing regime that have received the most criticism are:
- Purchasers are at risk of having their vehicle repossessed, if a previous 'logbook loan' taken out to finance the purchase of that vehicle has not been fully repaid; and
- Borrowers going into minor default under a logbook loan risk seeing their vehicles repossessed without a court order; that's even where a missed payment was just a blip.
How might the new proposals help the automotive sector?
The Law Commission is proposing a new 'Goods Mortgages Bill' which could address these flaws in the following ways.
- A new registration system is proposed, which would have the potential to marry up vehicle registration information held by the DVLA, with details on a 'goods mortgage register'. That could in turn be linked to vehicle identification numbers or other unique identifiers (for example, on board computer codes) to provide a robust record of whether a vehicle is currently subject to outstanding security granted by an individual.
- Commercial purchasers could then search the 'goods mortgage register' to check whether any security has been taken over a vehicle owned by an individual. Private individual purchasers would be protected on their purchases, as long as they act in good faith and don't have actual notice of the mortgage. And vehicle financiers could also check the register to see whether there is any security granted by individuals against a vehicle that they propose to fund.
- That is also backed up by a responsibility on those who have granted a goods mortgage, to disclose its existence. Otherwise they may face up to 10 years in jail for fraud.
- Possession rights will broadly be unchanged. However, there will be some new restrictions on when financiers can take possession of vehicles and on when they can enter premises without consent or a court order. These changes provide more comfort to a vehicle owner that financiers can't repossess unless there is good justification for doing so and there are new procedures that financiers will have to follow when enforcing.
Could the new proposals open up new streams of vehicle finance?
Car finance by way of loan has been around for a while and that is unlikely to change. For the new car market, 'personal contract plans' are already a very popular method of finance, as they typically allow the individual to make 'hire type' payments over say three to five years, with the option to purchase or return the vehicle at the end of the term. That flexibility can be very attractive to individuals as it allows them to consider switching to a new vehicle at the end of the term, without committing to the full purchase price (or to a high value loan). We expect that form of finance will remain popular.
However, it is the new goods mortgage security register that may breathe new life into the used car market. That's because it would help to remove the existing repossession risks associated with purchasers not knowing about existing logbook loans and it would give borrowers better assurances that they won't have their cars repossessed for minor defaults. Increased borrower confidence could make secured car finance more attractive. And as sums involved in financing used cars are typically lower than those for new cars, secured loans with terms of say 24 to 60 months may provide individual purchasers with the ability to purchase a good, reliable second hand vehicle by way of regular instalments, knowing that the vehicle is theirs once the final loan instalment has been repaid. In turn, a well maintained security register should allow financiers to both safely protect their security interest in a vehicle and perform pre-lending checks for existing security with greater ease and confidence. That greater comfort should expand that market and, at the same time, reduce enforcement costs and uncertainty. Both of these factors should result in savings for consumers and better profits for finance companies.
What about the electric vehicle market?
Our recent insight article 'Battery technology demand takes the lead and industry must follow suit' has looked at the projected growth in the electric vehicle market through to 2050 and due to the potential size and scale of that market, there is the possibility that vehicles and batteries could be financed separately.
Given the current cost of batteries, most consumers will need some form of funding or hire option for the battery where the finance package for the vehicle doesn't cover it. However, the attractiveness of any funding option over a battery, whether personal contract plan or loan backed by a goods mortgage, will ultimately depend on the useful life-span of the battery and its residual value to the owner once any finance has been repaid. If a battery has no useful life at the end of a loan or personal contract plan and it cannot be sold in the second-hand battery market or easily recycled, that may not be very appealing to the consumer.
But for financiers, even where batteries have no further useful life-span within vehicles, there could still be significant value in bulk recycling, given the rarity of some of the minerals used in battery manufacture. Whilst personal contract plans over batteries could allow financiers to crystallise that residual value at the end of a plan, financiers providing loans backed by goods mortgages over batteries could take into account recycling value in addition to functional value for their security valuations. That in turn, may allow financiers to lend a greater proportion of the battery cost to consumers up front, reducing the amount of initial deposit needed.
Financier incentives such as battery recycling schemes for purchasers, could also help to unlock some of that residual value. And if mineral prices increase as demand for electric vehicles increase, that could even provide an extra windfall for financiers.
For electric vehicle manufacturers seeking entry into the vehicle financing market, capital requirements and fund raising will be a major factor to entry, so the new goods mortgage regime may play an important role in ascertaining which form of funding is most capital efficient.
Some final thoughts
As with any form of asset based lending, lenders will be keen to ensure that their security value is preserved, so suitable borrower undertakings and adequate valuations and insurance will be important. For that reason, the new regime may only prove to be attractive to financiers who have the operational capability to monitor automotive assets, or who have the ability to put adequate systems in place.
Our insight article 'Out with the old, in with the new, what will goods mortgages mean for you?' contained a full set of the key Q&A's on the initial Goods Mortgages Bill proposed by the Law Commission in July 2017. Following an industry consultation, the Law Commission has recently published a slightly revised bill on its Bills of Sale webpage and HM Treasury is seeking views on that by 13 October 2017. As such, we may see some further changes to the proposals and in particular, final clarification on the new registration system and how that ties into vehicle licensing and identification will be welcomed.