Since the establishment of the Single Supervisory Mechanism (SSM) in November 2014, the focus has shifted from reducing mortgage arrears levels to reducing Non-performing Loans (NPLs). This shift in focus has been accompanied by a new strict definition Europe-wide of what constitutes an NPL by the European Banking Authority (EBA) which means that certain restructures are deemed NPL even if customers are meeting the revised payment schedule.
Officials in my Department met with staff of the SSM at the highest level on two occasions since late 2016. I also met Ms Nouy, Chair of the Supervisory Board of the ECB. In the course of these discussions my officials outlined the background and history to the restructuring effort in Ireland and questioned the logic of now classifying some types of restructured loans, including certain split mortgages, as NPL indefinitely. While we have been informed that the SSM is looking into the regulatory treatment of split mortgages across a number of European member states I have no evidence at this point that this categorisation is going to change.
I have been advised by the Central Bank of Ireland that in 2014, the European Banking Authority (EBA) introduced harmonized definitions of forbearance and non-performing for supervisory reporting purposes (referred to as the ITS on forbearance and non-performing exposures).
Per the EBA Implementing Technical Standards on supervisory reporting and the ECB Guidance on non-performing loans, non-performing exposures are those that satisfy either or both of the following criteria:
1. material exposures which are more than 90 days past-due;
2. the debtor is assessed as unlikely to pay its credit obligations in full without realisation of collateral, regardless of the existence of any past-due amount or of the number of days past due.”
Exposures should be classified as non-performing and/or forborne if they meet the relevant criteria outlined in the EBA ITS. In relation to curing, paragraph 157 outlines the criteria required for a non-performing forborne exposure to move back to performing status. Restructured NPLs can migrate back to performing when the criteria outlined in the EBA ITS has been satisfied, and it is the bank’s responsibility to conduct that assessment. Depending on the specificities of the restructure, it can take at least a year for a restructured NPL to move back to performing status.
As the Deputy will be aware, most loan agreements include a clause that allows the original lender to sell the loan on to another firm. The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (“the 2015 Act”) was introduced to fill the consumer protection gap where loans are sold by the original lender to an unregulated firm. Under the 2015 Act, if the firm who bought loans from the original lender is an unregulated firm, then the loans must be serviced by a ‘credit servicing firm’ which is regulated by the Central Bank. Credit Servicing Firms are firms that manage or administer credit agreements such as mortgages or other loans on behalf of unregulated entities.
Credit servicing firms must act in accordance with the requirements of Irish financial services law that applies to ‘regulated financial service providers’. This ensures that consumers, whose loans are sold to another firm, maintain the same regulatory protections that they had prior to the sale, including under the various statutory Codes of Conduct issued by the Central Bank such as the Consumer Protection Code 2012, Code of Conduct on Mortgage Arrears 2013, and the SME Regulations. Contractual terms are not changed by the sale of the loan.
Provision 3.11 of the Central Bank’s Consumer Protection Code 2012 (the Code) requires that, where a regulated lender intends to transfer all or part of its ‘regulated activities’ to another regulated entity, it must provide advance notification to both the Central Bank and affected consumers. Specifically, a lender must provide a consumer with at least 2 months’ notice before transferring all or part of its loan book covered by the Code to another person, including where the transferee is an unregulated entity. Where the transferee is an unregulated entity, the Code requires that the regulated lender also notify the consumer of the name of the regulated entity that will be ‘servicing’ the loan for the unregulated entity. In the event that there is a change in the credit servicing firm, the existing credit servicing firm must also notify the Central Bank and the consumer in advance, in accordance with the timelines set out under Provision 3.11 of the Code. Furthermore, I understand that the Central Bank expects all affected consumers to be informed of the term of their loan agreement which allows the loan to be sold and the identity and address of the new owner.
The Deputy will be aware that a Private Member’s Bill now titled the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2018 was considered by Select committee on 12 July. My officials worked with Deputy McGrath and other stakeholders to develop the Bill as initiated. This Bill will require that loan owners are regulated by the Central Bank. I expect that Report Stage will be taken after the summer recess.
I have also asked the Central Bank to carry out a review of the Code of Conduct on Mortgage Arrears (CCMA) to ensure it remains as effective as possible and for the review to be completed as soon as possible.
