The remains of Northern Rock have been ordered to pay back £261m in interest and fees to borrowers, due to badly worded paperwork, the High Court decided yesterday.
Northern Rock Asset Management (NRAM) is owned by the government, which nationalised the Newcastle-based lender when it collapsed in 2007. As a result, the bill for compensation will hit the taxpayer.
Around 43,000 customers will receive and average of just over £6,000 each.
The loans in question were unsecured debts, given to customers who already had mortgages with the bank.
Borrowers could take up to £30,000 more unsecured, but pay the same rate as they paid on their mortgages.
The error in the contracts arose for borrowers who took between £25,000 and £30,000 under the Together Mortgage offer.
The High Court found Northern Rock had failed properly to follow regulations which came into force in 2007, invalidating the loans and resulting in the order for repayment.
NRAM is considering whether or not to appeal against the ruling.
If it delays any payments, increased interest costs will mount at a rate of £3m per month.
In the wake of the nationalisation, Northern Rock split into two parts.
The so-called good bank part has been sold off to Virgin Money, but NRAM is managing the remainder.
It manages loans given out by Northern Rock before the crash, either holding them to maturity or selling off portfolios where possible.
“We brought this case to the High Court, because we are determined to act in full accordance with the law and do the right thing for both customers and taxpayers,” said Richard Banks, chief executive of UK Asset Resolution, which runs NRAM.
“We are disappointed by the decision because no detriment has been suffered by customers. We are now considering the impact of the judgment and taking legal advice on whether to appeal.
“Customers do not need to act at this stage. If any redress becomes due, we will write to all those affected to advise on next steps.”