On 21 February 2018, the largest opposition party in Ireland published a bill entitled the Consumer Protection (Regulation of Credit Servicing Firms) (Amendment) Bill 2018 (the "Bill").
The Bill follows increasing domestic political debate on the sale and ownership of Irish consumer and SME loans and mortgages (and related Irish consumer protection concerns). This debate has been triggered by reports of impending intended sales of non-performing and re-performing loan portfolios by Irish credit institutions such as Permanent TSB, Allied Irish Banks, Ulster Bank and Lloyds. This sell-side activity has been prompted by enhanced ECB pressure to de-leverage balance sheets and continued investor demand on the purchase side.
From 2015, non-regulated owners of relevant loans have been required to appoint an Irish-regulated credit servicing firm as the loan or portfolio administrator. This regime ensures that a relevant Irish borrower continues to enjoy the protection of Irish consumer protection even if the loan is sold to an unregulated entity. The most notable provisions are the Code of Conduct on Mortgage Arrears, the Consumer Protection Code and the SME Lending Regulations.
In some political circles this regime is perceived as inherently flawed.
The Bill proposes a new licensing requirement for carrying on the business of a "credit agreement owner". This is defined as a person who (other than a NAMA entity):
- Holds legal title to credit in respect of a credit agreement or a portfolio of credit agreements; and/or
- Determines the overall strategy for the management and administration of a credit agreement or a portfolio of credit agreements; and/or
- Determines the interest rate for a credit agreement or a portfolio of credit agreements; and/or
- The maintenance of control over key decisions relating to a credit agreement or a portfolio of credit agreements; and/or
- Takes such steps as may be necessary for the purposes of:
- Enabling the undertaking of credit servicing by another person; or
- Enforcing a credit agreement.
In addition, the Bill (if enacted) would introduce a number of other notable features, such as:
- Giving the Central Bank of Ireland (the "CBI") the power to direct wholesale customer redress where a loan owner systematically engineers customer default or enforces on the basis of immaterial breach of contract;
- Imposing restrictions on entities which acquire loans where a competitor is the borrower; and
- Requiring a loan purchaser to tell borrowers of the terms on which their loans were sold.
Although the new regulated activities above are broadly drafted, some portfolio acquisitions may be unaffected where delegated servicing and authority provided to existing credit servicing firms is sufficient, e.g. portfolios which have been securitised with the legal title to the loans residing with an Irish regulated entity (normally a retail credit firm to date).
However, as the Bill contains no grandfathering provisions if it is enacted in its present form (and only a three month transition period), all owners of relevant loans will need to audit their current structuring and servicing arrangements. Similarly, bidders on current loan books will need to scrutinise the Bill in order to best future-proof any acquisitions, as well as to understand any ongoing cost implications on bid pricing.
The actual licensing requirements will be left to the CBI to enumerate in due course (if the Bill is enacted). 'Section 110 SPVs' (often used to purchase portfolios) may have insufficient substance in terms of personnel to carry out key governance and compliance functions to be authorised by the CBI and given the qualifying conditions to Section 110 status within the Irish tax code. As such, any immediate structuring adjustments will likely tend towards ensuring the purchaser SPV is not a credit agreement owner by engaging the regulated credit servicing firm to conduct the above business within the law and spirit of the Bill and also that more classic securitisation technology may be applied to the purchase, servicing and finance arrangements.
While the Bill has just been introduced and may be amended as it progresses through the Irish parliament, it may well have enough political support to be enacted on an accelerated basis, and in a final form that achieves its primary regulatory objective of regulating loan portfolio purchasers.
Further, it is reported that the Bill may be just one element of an overall package designed to achieve the political goal of regulating the ownership of relevant Irish loans and enhancing Irish consumer and SME borrower protections, including potentially further amendments to the above codes of conduct and amending Irish law on the enforcement of loans (particularly where they are secured on a domestic residence).
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