A resident has issued a legal challenge to her local council over its ‘irrational’ use of Lender Option, Borrower Option (LOBO) loans.

Rachel Collinson is arguing that Newham Council was wrong to take out £563m in variable rate LOBO loans and is calling for auditor PwC to apply to the High Court for a ruling that the borrowing was illegal.

Ms Collinson said: ‘If Newham Council followed the lead of London housing associations and challenged the banks on what appears to be a clear case of LOBO loan mis-selling, we could lift this painful debt burden from the backs of some of the UK’s poorest people here in Newham.'

Debt Resistance UK, who highlighted the extent of LOBOs in local government through freedom of information requests, said High Court action could have a ‘significant’ impact on local government finances.

Jamie Griffiths from the campaign group, said: ‘Newham is an extreme case with over £1,800 of LOBO debt per resident of the borough but we’ve seen the same thing happening all over the country. Many of the cuts and council tax increases being made by local authorities are greatly exacerbated by interest payments on loans that should never have been taken out in the first place.

‘We’re calling for citizen-led challenges like that made by Rachel Collinson in each of the 250 councils affected by LOBO loan mis-selling.’

A Newham Council spokesperson said: 'The objection relates to the council’s decision to take out LOBOS between 2002 -2009 and this matter is with the council’s external auditors for their consideration under their statutory process.'

LOBO loans were pulled into the spotlight last year, following a documentary from Channel 4 Dispatches which revealed 240 local authorities had taken up to £15bn in LOBO loans.

An inquiry by the Communities and Local Government Select Committee heard these loans had interest rates of more than 7% in some cases, and some councils had paid brokerage fees of £25,000.