The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the "Act") was introduced to ensure that consumers and SMEs whose loans have been sold to unregulated entities will continue to enjoy the same protections they enjoyed prior to the sale of their loan. The Act creates a new type of regulated entity (the "credit servicing firm"). A credit servicing firm is one which interact directly with borrowers in relation to their loans. The Act amends the provisions of a number of the Central Bank Acts.
As credit institutions in the State continue to repair their balance sheets and deleverage through the sale of large loan portfolios some concern had been expressed in relation to the sale of such portfolios to unregulated buyers. This is because the sale of loan portfolios often resulted in consumers and SMEs losing the various protections which they had been afforded while dealing with their original lenders such as the Code of Conduct on Mortgage Arrears, the Consumer Protection Code and the Code of Conduct for Business Lending to Small and Medium Enterprises (the "Central Bank Codes").
Although many purchasers of loan books had already agreed to voluntarily apply the Central Bank of Ireland ("CBI") codes when managing loan books, voluntary compliance was not enforceable by any state agency. As a result, the Government committed to ensuring these protections would be made available for all consumers whose loans have been sold to unregulated entities. The Act will require entities engaging in credit servicing to be authorised by the CBI and subject to the Central Bank Codes.
WHAT IS CREDIT SERVICING?
The Act defines credit servicing as "managing and administering a loan agreement" and expressly includes a number of activities set out in the Act including:
- Notifying the relevant borrower of changes in interest rates or in payments due under the credit agreement or other matters of which the credit agreement requires the relevant borrower to be notified;
- Taking any necessary steps for the purposes of collecting or recovering payments due under the credit agreement from the relevant borrower;
- Managing or administering any of the
- repayments under the credit agreement;
- any charges imposed on the relevant borrower under the credit agreement;
- any errors made in relation to the credit agreement;
- any complaints made by the relevant borrower;
- information or records relating to the relevant borrower in respect of the credit agreement;
- the process by which a relevant borrower's financial difficulties are addressed;
- any alternative arrangements for repayment or other restructuring;
- assessment of the relevant borrower's financial circumstances and ability to repay under the credit agreement; or
- communicating with the relevant borrower in respect of any of the above matters.
The Act also expressly excludes certain activities from the scope of the "credit servicing" definition including:
- The determination of the overall strategy for the management and administration of a portfolio of credit agreements;
- The maintenance of control over key decisions relating to such portfolio; or
- Taking such steps as may be necessary
for the purpose of:
- enabling the undertaking of credit servicing by another person; or
- enforcing a credit agreement.
The Act excludes these activities to avoid a situation where the acquirer of a loan portfolio (usually an SPV) would fall within the definition of a "credit servicing firm" by simply taking steps to set the overall strategy for that loan portfolio (including the taking of steps to appoint a credit servicing firm).
WHAT IS A CREDIT SERVICING FIRM?
The legislation defines a credit servicing firm as a person (other than NAMA or any NAMA group entity) who undertakes:
- credit servicing other than on behalf of a regulated financial service provider authorised by the CBI or an equivalent authority in the EEA; or
- holds the legal title to credit granted under a credit agreement in respect of which credit servicing is not being undertaken by a person authorised to carry on the business of a credit servicing firm.
Existing regulated financial service providers authorised by the CBI or an equivalent authority in the EEA are deemed to be authorised to carry on the business of a credit servicing firm.
WHICH CATEGORY OF BORROWER DOES THE NEW REGIME PROTECT?
The Act applies to "Relevant Borrowers" under a credit agreement. The Act defines a Relevant Borrower as:
- a natural person (i.e. a person who is not a professional client for the purposes of the MiFiD Regulations nor a regulated financial services provider); or
- a micro, small or medium sized enterprise within the meaning of Article 2 of the Annex to the Commission Recommendation 2003/361/EC of 6 May 2003, but only to the extent that such credit was granted to it by a financial service provider authorised by the CBI or an equivalent authority in the EEA to provide credit in the State.
The Act provides for the deemed authorisation of firms which were conducting credit servicing activities before the Act came into effect. Those firms which enjoy a deemed authorisation must apply for authorisation to the CBI by 8 October 2015. Such firms will be required to comply with the Central Bank Codes immediately. New credit servicing firms must apply to the CBI for authorisation.
The CBI has recently published a consultation paper on the authorisation requirements and standards for credit servicing firms (Consultation Paper 96).
The Act is a welcome statutory extension of the protections afforded to consumers and SMEs whose loans have been sold by banks to unregulated entities.
Purchasers of loan portfolios must, however, exercise care to ensure that they do not stray into areas of activity which require authorisation and, to this end, the responsibility for "macro" decisions relating to loan portfolios and day to day decisions relating to the management of loans within those loan portfolios will need to be carefully defined.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.