New legislation proposed in Ireland will have implications for owners of Irish loans, persons lending into Ireland and securitisation structures
In 2014, a political issue surfaced in Ireland surrounding the sale of loan portfolios by a number of Irish banking entities. These portfolios were often acquired from regulated banks by newly-formed Irish special purpose companies. The Irish Government announced in July 2014 that it intended to introduce new laws "to ensure that borrowers whose loans are sold by a regulated entity to a currently unregulated entity maintain the same regulatory protections as they had prior to the sale". Following a consultation process, the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015 (the "Bill") was published by the Irish Government last week.
In the original consultation paper published in 2014, the Government had proposed to achieve this regulatory protection for borrowers by requiring the owners of any loans advanced to Irish consumers to become authorised as "retail credit firms". However, following the consultation, the Bill now proposes a different approach. The new approach would, in general, require the servicer (or in the absence of a servicer, the owner) of such loans to become authorised as a "credit servicing firm".
The consultation process prior to the Bill suggested that it was intended to regulate the interaction between loan servicers and Irish individual borrowers. Unfortunately, the drafting of the Bill introduces the unexpected result that any loans to Irish and non-Irish SMEs will now need to be serviced by an authorised credit servicing firm (both existing loans and new loans).
The Bill will permit customers of credit servicing firms (i.e. the underlying borrowers) to complain to the Irish Financial Services Ombudsman about the conduct of the firm and is intended to provide such customers with protection under the Central Bank's Code of Conduct on Mortgage Arrears, Code of Conduct for Business Lending to Small and Medium Enterprises and the Consumer Protection Code (the "Codes").
What is a "credit servicing firm"?
As mentioned above, the Bill introduces a new concept of "credit servicing firm". A credit servicing firm means a person who:
(a) undertakes credit servicing other than on behalf of a regulated financial service provider, or
(b) holds the legal title to credit in respect of which credit servicing is not being undertaken by
(i) a regulated financial service provider authorised, by the Central Bank of Ireland (the "CBI") or an authority that performs functions in an EEA country that are comparable to the functions performed by the CBI (an "Equivalent Authority"), to provide credit in Ireland, or
(ii) any authorised credit servicing firm.
A couple of things about the concept of credit servicing firm are notable. First, owners of loans who appoint servicers that are regulated financial service providers authorised to provide credit in Ireland by the CBI or an Equivalent Authority will not be required to become authorised as credit servicing firms. This exclusion would not extend to servicers that are authorised to undertake activities other than providing credit in Ireland (such as regulated mortgage administrators in the UK). Second, servicers who only provide credit servicing to Irish banks or Irish retail credit firms will not need to seek authorisation as a credit servicing firm.
What is "credit servicing"?
Credit servicing is defined as managing or administering a credit agreement, including:
(a) 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;
(b) taking any necessary steps for the purposes of collecting or recovering payments due under the credit agreement from the relevant borrower;
(c) managing or administering any of the following
(i) repayments under the credit agreement;
(ii) any charges imposed on the relevant borrower under the credit agreement;
(iii) any errors made in relation to the credit agreement;
(iv) any complaints made by the relevant borrower;
(v) information or records relating to the relevant borrower in respect of the credit agreement;
(vi) the process by which a relevant borrower's financial difficulties are addressed;
(vii) any alternative arrangements for repayment or other restructuring;
(viii) assessment of the relevant borrower's financial circumstances and ability to repay under the credit agreement;
(d) communicating with the relevant borrower in respect of any of the matters referred to in paragraphs (a) to (c).
The Bill clarifies that 'credit servicing' does not include:
(x) the determination of overall strategy for the management and administration of a portfolio of credit agreements;
(y) the maintenance of control over key decisions relating to such portfolio; o
(z) taking such steps as may be necessary for the purposes of:
(i) enabling the undertaking of credit servicing by another person, or
(ii) enforcing a credit agreement,
whether any action referred to in paragraphs (x) to (z) is taken by a person who holds the legal title to credit in respect of a portfolio of credit agreements (the "holder") or a person acting on behalf of the holder, provided that such action (whether taken by the holder or such person) is not taken in a manner that, if it were so taken by a regulated financial service provider, it would be a breach of any provision of financial services legislation.
These exclusions from the definition of credit servicing should be helpful for special purpose company owners of loans, master servicers of loans and trustees in securitisation deals. However, the strangely worded requirement referred to in the previous paragraph that these exclusions only apply where actions taken by a person are not "taken in a manner that if it were so taken by a regulated financial service provider it would be a breach of any provision of financial services legislation" is curious. The idea of requiring persons to comply with regulation in order to avoid being subject to authorisation and direct regulation is most unusual. There appears to be no relevant definition of "financial services legislation", so it is unclear what this term means. It may be a reference solely to primary laws and statutory instruments or it may be intended to include the Codes. In any event, it is unclear why it is required as the relevant credit servicing firm will need to comply with the Codes in implementing the overall strategy or key decisions.
"Credit agreement" means an agreement whereby a person grants, or promises to grant, credit to a relevant borrower. A "relevant borrower" is any individual person situated in Ireland or any SME (i.e. an entity that employs fewer than 250 persons and has an annual turnover of not more than €50 million and/or an annual balance sheet total of not more than €43 million). Notably, the definition of SME is very broad and SME is not restricted to Irish SMEs and would include companies, partnerships and sole traders.
Authorisation process and requirements for credit servicing firms
The Bill provides for a transitional period for persons deemed by the Bill to be existing credit servicing firms to seek authorisation. Such persons will be deemed to be authorised to carry on the business of a credit servicing firm until the CBI has granted or refused authorisation, provided that such person has applied for authorisation within three months of the enactment of the Bill.
Initially, the main obligation on a credit servicing firm will be the requirement that they apply to the CBI for authorisation to carry on such credit servicing business. The application will need to contain such information as the CBI requests (yet to be specified). The CBI, in refusing an application, shall specify in writing the grounds on which it is proposed to refuse the application.
In granting an application for authorisation, it may impose certain conditions on the authorised credit servicing firm. Specifically, although there is unlikely to be any minimum regulatory capital requirement, the CBI may impose a condition or requirement on a credit servicing firm to effect a policy of professional indemnity insurance. The level of substance the CBI might require of credit servicing firms is as yet unclear, but it is likely that the "mind and management" of the firm will need to be in Ireland such that the relevant senior executives will be required to be based in Ireland. The nature and level of business will dictate the number of staff required in Ireland.
Implications for owners of Irish loans, persons lending into Ireland and securitisation structures
Where a loan to a relevant borrower has been advanced or acquired by a person who has not appointed a servicer to service the portfolio, then that person will be required to seek authorisation under the Bill when it is enacted.
Where a loan to a relevant borrower has been advanced or acquired by a person who has appointed a servicer to service the portfolio, then that person will need to ensure that the servicer seeks authorisation under the Bill when it is enacted (unless the servicer is already regulated by the CBI). If the servicer does not seek authorisation (or fails to become authorised by the CBI in due course), then the person who advanced or acquired the loan will need to seek authorisation itself or else appoint an authorised credit servicing firm.
Where a loan to a relevant borrower has been advanced or acquired by a person who has appointed a servicer to service the portfolio, it is sometimes the case that the servicer may delegate some of the activities outlined in the definition of "credit servicing" to a third party (such as collection or recovery services). In such cases, it would be prudent for the servicer to ensure that the third party is authorised under the Bill when it is enacted (unless the third party is already regulated by the CBI).
In some cases, loans have been acquired by a special purpose company that has separately appointed both a servicer and a master servicer (where the master servicer oversees the servicing arrangements). In such cases, it is likely that the servicer will always need to seek authorisation under the Bill. However, it is also possible that the master servicer may need to seek authorisation if it provides any services that are not excluded from the definition of "credit services" as set out above.
Where any loan to a relevant borrower has been included in a securitisation or CLO structure, in addition to the requirement for the servicer or manager to seek authorisation, any back-up servicer should also seek (or be required to seek) authorisation. Further, where any special servicer is appointed, the special servicer will need to seek authorisation.
In the case of loans (including intra group loans and syndicated facilities) to SMEs, if no servicer has been appointed, the lenders may need to seek authorisation under the Bill. In addition, unregulated facility agents and security trustees may also need to seek authorisation under the Bill.
Will the Bill be enacted in its current form?
Although the Bill appears to be in relatively final form, it is possible that some changes will be made to the Bill before it is enacted. For example, it is surprising (and possibly unintended) that the Bill might require lenders to non-Irish SMEs to become authorised as credit servicing firms. It is also questionable whether all non-bank lenders to Irish SMEs should be required to be authorised as credit servicing firms even where they are only managing a loan that they have advanced to an Irish SME. This would appear to militate against the current policy of encouraging non-bank finance into the Irish market. It is anticipated that the Bill will progress through the Irish Parliament over the next few weeks.
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