The Central Bank has published its Report on the Effectiveness of the Code of Conduct on Mortgage Arrears in the context of the Sale of Loans by Regulated Lenders, in response to the Minister for Finance's request for a review of the Code to ensure its continuing effectiveness when mortgage loans are sold.
The Central Bank has concluded that, for borrowers who engage with their lenders, the Code is "working effectively and as intended".
In its Report, the Central Bank reiterated that the protections of the Code travel with the loan i.e. the Code continues to apply where the loan is purchased by an Unregulated Loan Owner, as the loan must be serviced by a Bank, Retail Credit Firm, or Credit Servicing Firm authorised by the Central Bank.
The Central Bank sought feedback from various stakeholders when researching its Report, carried out inspections of two Credit Servicing Firms (covering 79% of PDH loans serviced by authorised Credit Servicing Firms), one Retail Credit Firm, and one Bank, and gathered data in respect of restructuring arrangements being put in place by Banks, Retail Credit Firms, Credit Servicing Firms, and Unregulated Loan Owners.
Mortgage Arrears Resolution Framework (MARP)
The Code's MARP framework gives a clear framework for borrowers in arrears to engage with their lenders. The percentage of borrowers in arrears who have not entered into a restructured arrangement with their lender of record and are not cooperating with that lender is 32% for Retail Credit Firms, 47% for Banks, and 63% for Unregulated Loan Owners
Banks, Retail Credit Firms, and Credit Servicing Firms acting on behalf of Unregulated Loan Owners, continue to put in place arrangements for borrowers who engage with the MARP.
Compliance with the Code
The Central Bank did not find any evidence that the two Credit Servicing Firms inspected did not attempt to engage with borrowers in arrears. The Central Bank did not identify any material breaches of the Code by these firms.
The Central Bank also found that where a loan is sold to an Unregulated Loan Owner, existing arrangements with borrowers are honoured by Retail Credit Firms and Credit Servicing Firms acting on behalf of Unregulated Loan Owners until the agreed term of the arrangement comes to an end. Borrowers can then be offered a different arrangement from the suite of arrangements considered by the relevant Retail Credit Firm/Credit Servicing Firm acting on behalf of the Unregulated Loan Owner, within MARP framework.
The Central Bank found no evidence that borrowers whose circumstances have not changed are being moved off existing arrangements by Credit Servicing Firms acting on behalf of Unregulated Loan Owners during the term of the arrangement.
The Code requires a regulated entity to examine all arrangements that it offers with a view to determining which, if any, might be viable for the relevant borrower.
It appears that Unregulated Loan Owners consider more arrangements when compared to Banks and Retail Credit Firms. The Central Bank's research indicates that Unregulated Loan Owners consider an average of 13 types of arrangements, with Banks considering (on average) 9, and Retail Credit Firms considering (on average) 8. However, regarding arrangements actually put in place, the research indicates that Banks and Retail Credit Firms are putting in place a wider range of arrangements, albeit that the narrower range of arrangements put in place by Unregulated Loan Owners could be explained by the fact that they hold a higher proportion of PDH mortgage accounts in > 720 days arrears.
In respect of arrangements in place as at the end of Q1 2018, arrears capitalisation is the most common restructuring arrangement in place by Banks, Retail Credit Firms and Unregulated Loan Owners, although reduced payment arrangements (greater than interest-only) were the overall favoured option of Unregulated Loan Owners from Q1 2016 to end-Q1 2018. Term extensions are agreed much more frequently by Banks, than by Retail Credit Firms or Unregulated Loan Owners.
From Q1 2016 to end-Q1 2018, Banks put in place a 50/50 split between temporary and permanent arrangements. Retail Credit Firms put more long-term than short-term arrangements in place, while two-thirds of the restructuring arrangements put in place by Unregulated Loan Owners were short-term.
The Central Bank found no material difference in the level of repossession activity by Unregulated Loan Owners when compared with Banks and Retail Credit Firms.
From Q1 2016 to end-Q1 2018, 3,431 properties were repossessed, 88% by Banks, 8% by Retail Credit Firms, and 4% by Unregulated Loan Owners. As a percentage of the number of PDH mortgage accounts in arrears held by them during that period, Banks repossessed 5%, Retail Credit Firms repossessed 4% and Unregulated Loan Owners repossessed 2%.
The Report quotes from the Central Bank's Residential Mortgage Arrears & Repossessions Statistics: Q1 2018 and the equivalent statistics for Q2 2018 have since been published (Residential Mortgage Arrears & Repossessions Statistics: Q2 2018). Those statistics indicate that the overall position in relation to PDH mortgage accounts is as shown in Fig. 1 below.
|Figure 1||Q4 2017||Q1 2018||Q2 2018|
|PDH Mortgage Accounts in Arrears||70,488
|< 90 days arrears||22,055||23,295||20,471|
|91-180 days arrears||5,610||5,480||5,323|
|181-360 days arrears||5,858||5,710||5,413|
|361-720 days arrears||8,019||7,839||7,035|
|> 720 days arrears||28,946||29,509||28,237|
At the end of Q2 2018, 79% of PDH mortgage accounts in arrears were held by Banks, with 5% held by Retail Credit Firms, and 2% by Unregulated Loan Owners. A total of 116,010 PDH Mortgage Accounts were the subject of a restructured arrangement at that date, with 87% complying with the terms of that arrangement.
What happens next?
The Central Bank has indicated that it will "...continue to assertively supervise regulated firms' compliance with the Code, to ensure that a fair and transparent process is in place for all borrowers in or facing mortgage arrears, including those whose loans have been sold."
It reiterated several times in the Report that it will not interfere with strategic or commercial decisions taken by regulated entities, but it will track maturity profiles of restructured arrangements over time, and look at other patterns of behaviour that might signal non-compliance with the Code.
While the Central Bank is not proposing to revise the Code at this time, it plans to engage with industry regarding the provision of "fuller information to borrowers" on how their cases are assessed, and the reasons why certain restructured arrangements are not considered for specific borrowers, or are not seen as appropriate or sustainable.
Separately, the Central Bank expressed the view that uptake for personal insolvency arrangements under the Personal Insolvency Acts is relatively low, and has called for potential enhancements to the personal insolvency regime to be explored with a view to increasing the use of the debt settlement mechanisms available under that regime.
The Minister for Finance has welcomed the Central Bank's Report, noting that the Central Bank is not proposing to amend the Code at this time, but confirming that it will support changes that the Central Bank may see as necessary in the future.
The request to the Central Bank from the Minister for Finance was made around the time that the legislative proposal to regulate loan purchasers was introduced by Fianna Fáil in Q1 2018. That Bill (the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2018) passed Committee Stage in Dáil Éireann on 12 July 2018, and the next stage in the legislative process (Report Stage in Dáil Éireann) is scheduled for this Thursday 22 November 2018.
Notably, the Report reinforces the view that PDH borrowers whose loans are sold retain the same legal and regulatory protections that they had before their loans were sold, can continue to engage with the MARP framework, and can potentially access a wider range of restructuring options.
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.