The Revised Code Of Conduct On Mortgage Arrears - Charges, Mortgages, Indemnities

The revised Code of Conduct on Mortgage Arrears 2013 (the "Revised CCMA") was published by the Central Bank of Ireland (the "Central Bank") early on 27 June 2013 - it will take effect from 1 July 2013. In its press release, the Central Bank stated that the Revised CCMA was intended to provide a "strong consumer protection framework to ensure that borrowers struggling to keep up mortgage repayments are treated in a fair and transparent manner by their lender, and that long term resolution is sought by lenders with each of their borrowers".

Recent Statistics

Statistics published by the Central Bank on 21 June 2013 indicated that, of the 774,109 mortgages over primary residences in Ireland at the end of March 2013, 12.3% were 90+ days in arrears (compared to 11.9% at the end of Q4 2012) and, of the 149,395 buy-to-let residential mortgages in Ireland at the end of March 2013, 19.7% were 90+ days in arrears (compared to 18.9% at the end of Q4 2012). Further, the majority (55%) of mortgage restructuring arrangements agreed as at 31 March 2013 by banks with distressed borrowers were of an 'interest only' or 'reduced payment' nature (down from 59% at the end of Q4 2012).

Background to the Revised CCMA

On 13 March 2013 the Central Bank published:

Consultation Paper CP 63 ("CP 63"), a review of its existing Code of Conduct on Mortgage Arrears (which had last been updated with effect from 1 January 2011)
its Mortgage Arrears Resolution Targets

The Arthur Cox Finance Group's March 2013 Briefing, 'Resolving the Mortgage Arrears Crisis', can be found here: http://www.arthurcox.com/uploadedFiles/Publications/Publication_List/resolving_the_mortgage_arrears_crisis_march2013.pdf and the Central Bank's consultation period under CP 63 ended on 10 April 2013.

These developments followed various steps taken by the Government and the Central Bank in relation to mortgage arrears and bankruptcy, including the publication of the report of the Inter- Departmental Mortgage Arrears Working Group (known as the Keane Report) in October 2011, the signing into law of the Personal Insolvency Act 2012 (the "PIA") on 26 December 2012, the formal establishment of the Insolvency Service of Ireland (the "ISI") on 1 March 2013 and the development by the leading banks (in conjunction with the Central Bank) of their Mortgage Arrears Resolution Strategies. The announcements of March 2013 were then followed by:

the publication, by the Department of Justice, of the Land and Conveyancing Law Reform Bill 2013 on 28 March 2013 which is intended to remedy the legal issues surrounding the ability of banks to seek court orders for possession in respect of registered land which came to light as a result of the 2011 High Court decision of Dunne J. in Start Mortgages Ltd & Ors v Gunn & Ors [2011] IEHC 275. That Bill is continuing to progress through the Houses of the Oireachtas, and is expected to be enacted over the summer months
the publication, on 8 May 2013, of the Central Bank's Pilot Scheme for Multi-Debt Restructuring
the launch by the ISI of its website on 18 April 2013
the publication by the ISI of its Guide to reasonable living expenses and other detailed guides and sample scenarios for debt relief notices, debt settlement arrangements and personal insolvency arrangements under the PIA in April 2013
the publication by the ISI of details of the application process for persons wishing to be authorised as approved intermediaries or personal insolvency practitioners under the PIA in June 2013

Transitional Arrangements

In its letter to lenders of 26 June 2013 (published on its website on 27 June 2013) the Central Bank confirmed that:

where the Revised CCMA results in lenders needing to make systems, procedural or documentary changes, or provide staff training, lenders must start this process immediately, but the Central Bank will be cognisant of the time required to make those changes and provide that training for a six month period until 31 December 2013
the Revised CCMA will apply to existing arrears cases, and not just to arrears cases arising after 1 July 2013

Key Amendments

The key amendments to the existing mortgage arrears regime introduced by the Revised CCMA are set out below. Notably, unless a borrower in arrears co-operates with a lender, a lender will be able to bring repossession proceedings at a much earlier stage under the Revised CCMA than under the previous CCMA, where a 12 month moratorium period applied with an ability on the part of the borrower to ensure that the 'clock' frequently stopped

'not co-operating': the Revised CCMA clarifies when borrowers will be treated as 'not co-operating', thereby losing its protections. To date, for so long as a distressed borrower responded to at least one communication from a lender in a 3-month period that borrower could (so long as it had provided any required information to the lender) avoid being classified as 'not co-operating'. This enabled well-advised borrowers to 'game the system' to some extent. The Revised CCMA now requires that any response from a borrower be meaningful, i.e. the borrower must respond with a view to enabling the lender complete its assessment of the borrower's circumstances. Lenders will also have to explain, in their information booklet issued as part of their Mortgage Arrears Resolution Processes ("MARPs"), and in other communications, the consequences of a borrower being classified as 'not co-operating', provide a borrower with at least 20 business days' notice in advance of classifying the borrower as 'not co-operating' (setting out what the borrower needs to do to ensure that this does not happen) and also issue a further communication when the borrower has been classified as 'not co-operating', setting out the consequences (including that the lender can begin repossession proceedings immediately)
unsolicited communications – cap removed: the cap on the number of unsolicited communications that a lender may make to a borrower each month has been removed (as has the concept of unsolicited communications). Previously, the number was capped at three and had been the subject of significant criticism from the banking industry as an impediment to dealing with early arrears cases. Lenders must now ensure that communications are 'proportionate and not excessive' and that borrowers are given sufficient time to complete actions that they have committed to completing. The Revised CCMA also contains new provisions (along the lines of those proposed by CP 63) setting out a lender's obligation when making an unsolicited personal visit to a distressed borrower
policy on communications: lenders will now be required to draw up and implement a policy on communications with distressed borrowers (approved by the relevant lender's board of directors), and will be required to keep recordings of all calls made to, or received from, borrowers by the lender's Arrears Support Unit ("ASU") in relation to arrears or pre-arrears cases
temporary arrangements: lenders may put in place a temporary 'alternative repayment arrangement' with a borrower, for a limited period of time, while assessing the borrower's 'Standard Financial Statement'
PIA: lenders must bring to the attention of distressed borrowers that a failure to co-operate may impact on the borrower's ability to successfully apply for a personal insolvency arrangement under the PIA. While the suggestion in CP 63 that lenders provide the ISI's publications to borrowers was not reflected in the Revised CCMA, lenders must still provide borrowers in arrears with a link to the ISI's website
types of 'alternative repayment arrangement': the list of types of 'alternative repayment arrangement' that a lender must consider has been expanded significantly to include equity participations, split mortgages, principal reduction, permanent interest-rate reductions and temporary interest-rate reductions – this is a fundamental development and was not diluted between CP 63 and the publication of the Revised Code
tracker rates: while the Central Bank had sought views in CP 63 as to whether, where an advantageous 'alternative repayment arrangement' is offered to a borrower (such as a principal reduction) the lender could move the borrower off a tracker rate (under the previous CCMA, lenders were prevented from requiring distressed borrowers to move off tracker rates), the Central Bank has instead inserted a provision whereby a lender may offer an 'alternative repayment arrangement' to a borrower which requires the borrower to move off a tracker rate only where the lender has concluded that this is more appropriate and sustainable for the borrower than remaining on the tracker rate
repossession proceedings: where a lender is not willing to offer a borrower an 'alternative repayment arrangement', or a borrower is not willing to enter into an 'alternative repayment arrangement' offered by a lender, the lender, in the letter that it is required to send to the borrower in either case outlining the borrower's options, must inform the borrower that repossession proceedings may be brought three months from the date of the letter or, if later, eight months from the date that the arrears arose. Where a borrower is classified as 'not co-operating' whether for the reasons set out above or because he/she has failed to provide information or failed to provide it in a full and honest manner, or where a borrower has perpetrated a fraud on the lender or otherwise breached the mortgage loan contract, repossession proceedings may be started immediately

Other Points to Note:

Prescribed Financial Statement: the Central Bank has appended the currently-prescribed form of 'Standard Financial Statement' to the Revised CCMA. It had consulted on whether there should be particular situations where full completion of the prescribed form of 'Standard Financial Statement' would not be necessary, but no provision to this effect was included in the Revised CCMA
appeals: lenders' CCMA Appeals Boards will now only consider appeals of decisions of ASU's. Issues regarding lenders' compliance with, and treatment of borrowers' cases under, the Revised CCMA will instead now be dealt with under the complaints procedure that lenders have in place under the Consumer Protection Code 2012. While detailed provisions in relation to appeals do remain in the Revised CCMA, and a further obligation has been inserted on lenders to maintain an up-to-date log of all appeals, the appeals process is no longer a component part of the MARP itself
reviews: while in CP 63 the Central Bank proposed review periods for different types of 'alternative repayment arrangement' (every 12 months for arrangements of less than 3 years, every 3 years for arrangements of between 3 and 5 years, every 5 years for arrangements over 5 years with no review requirement for permanent restructuring arrangements), this was not reflected in the Revised CCMA, which instead simply obliges lenders to review 'alternative repayment arrangements' at appropriate intervals and in any event at least 30 calendar days before the arrangement coming to an end (and at any time if requested to do so by the borrower)
confidentiality agreements: where a lender could require a borrower to sign a confidentiality agreement in relation to an 'alternative repayment arrangement' or other option offered to a borrower (which was the subject of some commentary in the run-up to the publication of the Revised CCMA), the lender's information booklet must give borrowers summary information on the lender's potential use of such agreements
pre-arrears: the circumstances where a pre-arrears case may arise have been broadened beyond the borrower containing the lender to circumstances where the lender otherwise establishes that the borrower is in danger of going into financial difficulties
staff incentives: where a lender sets targets or offers incentives to staff who deal with borrowers in arrears, the lender must ensure that such targets/incentives do not impair how the borrower is treated
annual contact with all borrowers: lenders will now have to write to all borrowers (not just borrowers in arrears) annually to encourage early contact in an arrears or pre-arrears situation
tailored/more detailed information: overall, the requirements regarding the contents of lenders' information booklets and letters to borrowers in arrears are now much more extensive than under the previous CCMA, meaning that lenders will need to tailor correspondence to a borrower's individual circumstances to a much greater extent

What Happens Next?

Under the Mortgage Arrears Resolution Targets published by the Central Bank on 13 March 2013, ACC, AIB (including AIB Mortgage Bank, EBS and EBS Mortgage Finance), Bank of Ireland (including Bank of Ireland Mortgage Bank and ICS Building Society), KBC, permanent TSB and Ulster Bank are obliged to have proposed sustainable mortgage solutions to 20% of distressed mortgage borrowers in 90+ days' arrears by 30 June 2013. However, given that it is not yet possible for a borrower to appoint a personal insolvency practitioner under the PIA as the relevant part of the PIA has not yet been commenced (such an appointment is one of the options available to those lenders to ensure compliance with the requirement to have proposed a sustainable mortgage solution) it is not yet clear whether all affected lenders will meet that target.

The Central Bank has required lenders to develop implementation plans setting out how each lender will manage the transition from the previous CCMA to the Revised CCMA – those plans must be provided to the Central Bank by 31 July 2013.

While the ISI is now inviting applications from persons who wish to be authorised as approved intermediaries or personal insolvency practitioners under the PIA, the provisions of the PIA which will enable individuals to apply for debt relief notices, debt settlement arrangements or personal insolvency arrangements remain to be commenced. The Courts and Civil Law (Miscellaneous Provisions) Bill 2013 proposes amendments to both the PIA (in relation to the maintenance of registers) and the Bankruptcy Act 1988 (which will also be amended by the PIA once commenced) and is progressing through the Houses of the Oireachtas at the moment but it is not yet clear whether that Bill and the remaining commencement orders under the PIA will be signed into law at the same time. The Land and Conveyancing Law Reform Bill 2013 is also expected to be signed into law shortly and, while that should resolve the issues that arose in light of Start Mortgages Ltd & Ors v Gunn & Ors [2011] IEHC 275 as regards court orders for possession in respect of registered land where legal proceedings have not yet commenced, it will not (as currently drafted) resolve those issues insofar as they have arisen in respect of proceedings that have already been taken.

Comment

The Central Bank clearly hopes that the Revised CCMA, which provides lenders with more flexibility when engaging with borrowers in distress, will enable lenders to finally take the necessary steps to play their part in effecting a lasting resolution of the Irish mortgage arrears crisis. The Revised CCMA also appears to reflect a recognition on the part of the Central Bank that the previous iterations of the CCMA hampered lenders' ability to engage proactively during the early stages of borrowers' arrears and permitted savvy borrowers to 'game the system' by cooperating on an occasional basis with their lender. Whilst there has been criticism from consumer advocates, borrowers in distress should see the measures as opening the possibility (and in some cases the probability) of debt write-downs and debt forgiveness. When taken with the other measures mentioned above, it is to be hoped that the Revised CCMA does indeed allow lenders to deal effectively, decisively but compassionately with borrowers in distress - and to resolve the residential mortgage portion of their balance sheets.

The Revised CCMA will be of interest to many parties including banks and their shareholders, sellers and buyers of mortgage portfolios and investors in Irish RMBS.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.