Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach díospóireacht -
Wednesday, 13 Dec 2023

Credit Servicers Directive: Discussion

An Cathaoirleach

The minutes of the joint committee meeting of 6 December were agreed at our meeting this morning. We have apologies from Senator Maria Byrne and Deputy Matthews. In today's session, the committee will engage on the topic of the credit servicers directive. On behalf of the committee, I welcome the Master of the High Court, Mr. Edmund Honohan. We are honoured to have him here and we are looking forward to his contribution.

I ask members and witnesses to note that when they are here on campus they have full privilege. Should they be off campus when joining us, they only have partial privilege. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

We will commence our meeting with an opening statement from the master.

Mr. Edmund Honohan

Apparently the Minister has decided not to incorporate any of the optional measures in ease of distressed borrowers that were suggested by the EU, but this decision is not his to make. It is legislative in nature and Article 15.2 of the Constitution is engaged. In short, it is a matter for the Oireachtas and primary legislation. Further, the Minister’s decision was made, not by himself, but by his officials, acting in line with the presupposed authority that relies, for legality, not on formal delegation, but on the Carltona principle. As a member state of the EU, Ireland’s measures to implement a directive cannot be validly effected by a public servant, however senior. Carltona does not stretch that far. The committee should know that the general view is that officials in the Department of Finance are locked in the mindset of moral hazard. This is illustrated yet again by the two year delay in actioning the 2021 directive, the one we are concerned with today. The amendment to the 2014 directive by Article 28 could even have been fast-tracked as a one-liner, if anyone cared enough. It is also illustrated by the general tone of the questions raised in the public consultation regarding the options. It is there presupposed, but on what authority? That Ireland will not respond positively to the suggestions. Lobby groups’ fingerprints are plain for all to see.

Of even greater concern is the proposal to treat the hard law directive as transposed fully by creating new "soft law" guidelines coupled with Central Bank monitoring of the "explain or comply" variety. The directive requires Ireland to oblige credit purchasers to start offering forbearance. If it is to be a legal obligation, failure to comply must end with a penal sanction. It is to be noted also that, where the Central Bank is the agency charged with the implementation of the directive, which will be directly effective come the end of this coming December, failure by the bank to enforce the obligation aforesaid will not be shielded from suit or liability, the provisions of the Central Bank Acts notwithstanding.

Committee members will have noted the Central Bank’s statement in a letter to me dated 9 June 2022 that "questions of title by reference to land registration laws fall outside the competence of the Central Bank". Is this a skill set problem, or what? Surely the prudential remit of the bank requires detailed overview of balance sheets, of risk management, of capital adequacy, especially for proprietary trading desks. The bottom line for a bank’s loan portfolio should not be audited on the strength of a bank’s stated valuation, without checking legal title. How else do you weigh the risk of contagion? Equally concerning for me is the fact that, my correspondence notwithstanding, the Central Bank appears to be uninterested in the topic and unlikely, apparently, to undertake any investigation. The regulator is taking the regulatee at its word, and such naïve, light-touch supervision is now apparently also proposed in respect of credit purchasers and servicers. This "no questions asked" attitude is shared with the Companies Registration Office, the Land Registry, and the Charities Regulator, which rubber-stamps the activities of the charities that are the shareholders in "orphaned" private capital intermediaries. These agencies all got the memo. Revenue is an honourable exception.

On unfair terms in consumer contracts, SI 14 of 2020 designates the Central Bank as a competent authority for the enforcement of the EU’s 1993 unfair consumer contract terms directive to ensure compliance with "laws enhancing the protection of consumers’ economic interests." Who knew? Does the Central Bank know, or is it a RINO, a regulator in name only? Here is a question the committee should put to them. What reason do they consider valid for the purposes of subparagraph (j) of paragraph 1 of the annex of terms referred to in Article 3(3) of the 1993 directive, as scoped at subparagraph 2(b) of the same annex? Perhaps it could be put more succinctly thus: is there ever a “valid” reason for supernormal profits? Here is another one. Is it "in good faith" for a loan originator to use the assignment option to sell in market covert - not overt but covert - to a connected but unregulated purchaser? How can a borrower’s consent be considered as fully informed? Should not the borrower at least have an implied call option at the same discounted price? Would that be “too administratively difficult”, as we were informed when the portfolio sales were commenced around 2012? Perhaps the borrower’s blind consent to assignment is covered by subparagraph 1(p) of the annex referred to and, therefore, “unfair” as defined.

I will move on to some questions about forbearance and proportionality. Compliance with the new directive will be assessed by reviewing outcomes case-by-case. Will the servicer, the purchaser and the originator all be obliged to complete SFS-style recitals of loan history, including pre-assignment facts as recorded on their files? Will the financial profile of the credit purchaser be interrogated? I refer to a High Court judgment regarding Hayes, a debtor, 2017, in which the credit purchaser "is not a lender and accordingly the test of unfair prejudice regarding its interest must be seen in the light of investment returns and not the cost of the capital needs of the creditor in the future". That is Ms Justice Baker. Will the proportionality be assessed by reference to the face value of the debt or the book value? Will the servicer have to fully account for any alleged GRG-style engineering of default? That is the RBS scandal. For the assessment of proportionality, will the purchaser’s cost of funds be adjusted for tax avoidance interest limitation rules? Should the charitable status of the ownership vehicle of the credit purchaser be subject to revocation if a credit servicer acts without regard to a borrower’s rights to fair treatment and proportionate forbearance? Is the Central Bank competent to override the Charities Regulator on this point and-or to determine the liabilities of the shadow SPV directors?

When I wrote to Oireachtas Members last month, I described the legal changes as a "new moratorium", and perhaps I should explain. The directive obliges Ireland to require credit purchasers to forebear. It is only when bona fide efforts to resolve matters have failed that proceedings to obtain recovery of collateral can commence. Judges need to be told this. It is EU law but they still need to be told. Will the Oireachtas tell them?

Deputy Pearse Doherty

I welcome the master to the committee. I appreciate his opening remarks. I want to pick up on his last point. Surely judges should know what the law is themselves. Why is it up to Oireachtas Members to tell judges what the law is, whether domestic or EU law?

Does Mr. Honohan believe there is an issue here? Are those who advocate on behalf of borrowers not outlining this to judges before the courts, or is there a view that judges are dismissing this issue?

Mr. Edmund Honohan

There is an astonishing ignorance on the part of the public as to what exactly judges know or do not know. Technically, they come into court with a clean sheet of paper, and it is the responsibility of counsel and the parties to tell the judge what the law is. Often, it is the case that the judge will say he or she does not need to be told and that he or she knows what the law is, but sometimes a position, proposition or a submission is made by one party to which the other party is not in a position to respond. The judge then is left with a situation where he or she may or may not have the resources to go and inform himself or herself, but there is no obligation to do so. When I started as a master, there was a rather amusing practice in place which was the link between this place and that place, whereby I was sent three hard copies of every statutory instrument in a brown envelope. That was the link between the Oireachtas and the Judiciary. Apart from that, there was no formal method of communicating the content of statutory instruments. The problem is, according to Trevor Redmond in Law of the European Union:

Article 4 of the TEU imposes on the Member States an obligation to take any appropriate measure, general or particular, to ensure fulfilment of the obligations arising out of the Treaties, or resulting from Acts of the Union institution. This obligation provides the bedrock for another principle that is similar to, but distinct from, the principle of effectiveness, and runs parallel to it. It is the principle of effective judicial protection.

If judges do not know the law, they cannot effectively judicially protect the interests of the citizens of the community. There is an information deficit in how the judges are operating at the moment. I am not sure what the solution to this is, but it does seem to me that we may be focusing or narrowing in on the solution relating to credit servicers and purchasers with this directive. It seems that an obligation arises now on the Central Bank to keep the public informed as to what the position is on forbearance, rates of interest and so forth. That obligation is one that they cannot continue to shield behind a big black hole of confidentiality. The public is entitled to know what is going on in respect of forbearance of debt and mortgage arrears, and the public cannot have judicial protection without knowing what the Central Bank is doing.

Deputy Pearse Doherty

Obviously, there is a multitude of cases. Some of them are very different and complex while others are very similar and, therefore, as Mr. Honohan has pointed out, there is an onus on the Central Bank to inform the public of their rights and obligations under the directive and other types of EU and domestic legislation. He has rightly noted that judges rely on counsel on both sides to inform him or her as to the legal position in the case that is before him or her. The judge may draw from his or her own experience in interrogating counsel. Going back to Mr. Honohan's statement about the Oireachtas informing judges, it is counsel's obligation to inform judges of the legal position that is before them? Is it Mr. Honohan's view that there is a misleading of judges, in cases that are before the courts, by counsel or advocates in certain circumstances?

Mr. Edmund Honohan

I will put it this way. There is information out in the ether that is the law, but for a lay litigant, there is a paywall. He or she cannot access this information without committing himself or herself to huge expenditure. That being the case, there is certainly the temptation on the part of counsel to dodge the awkward questions on the legal position. He or she is on a fair bet that he or she will not be picked up on it by the lay litigant on the other side. I will give members an example. The 2013 Act, which the Oireachtas passed, allowed for the Circuit Court to adjourn repossession cases for two months to allow the defendant to consult a personal insolvency practitioner, PIP. The language of the Act is fairly clear. It provides that the judge "may" do this. Of course, it cannot say that the judge "shall" do it because that is an interference with the independence of the Judiciary. There we have a provision which states that the judge may do this off his or her own bat. That was 2013. I have never seen a case where a lay litigant has been given two months to go and consult a PIP. The reason for that is the counsel on the other side will not have reminded the judge that there is an option there for him or her to adjourn the case for two months. Judges are tearing their hair out and finding reasons to adjourn, but there is a specific statutory reason that has not been drawn to the attention of judges in any way by the plaintiffs in these cases, namely, the 2013 Act.

I will give members another example, which is quite interesting. It is the introduction of the Code of Conduct on Mortgage Arrears, CCMA, which came in in 2013. I do not know if members have read the submission from Professor Kenna. In any event, the mortgage arrears resolution process, MARP, was introduced in late 2013 under the code. I recall some surprise when in court I produced copies of the code, handed them out to the parties and said no one was going to get an order for possession until they had complied with the code. Nobody had told me to do that and nobody had told the judges that there was a new code. In fact, we then had a ding-dong battle, with a judge ruling eventually that the code was not justiciable, which is to say that it was not legally binding anyway. Eventually, it went to the Supreme Court and another judge, who was later the Chief Justice, decided that only one part of the code was legally binding. I cannot remember which part it was but the point is that it was a developing understanding of the nature of the legal obligation arising out of the code.

Finally, in 2020-----

Deputy Pearse Doherty

That was the Dunne case in terms of the moratorium. That part was-----

Mr. Edmund Honohan

That is right. That is the one that was held to be----

Deputy Pearse Doherty

It was in 2015.

Mr. Edmund Honohan

In 2014, a year after the introduction of the code, the EU adopted the first mortgage credit directive. By 2020, the penny had dropped with the Supreme Court and it said that looking at the 2014 directive, these codes are enforceable. It is ridiculous. It took seven years for the courts to realise that these codes were enforceable. During that time, how many people lost their homes? I do not know. There is something wrong with a system that allows a court to proceed on the basis of a misunderstanding. One has to go back to the EU and ask if the EU can fault Ireland for not providing the mechanisms for judicial protection. I will give members an example of that. It is well worth me referencing it. In Law of the European Union, Trevor Redmond notes that the principle of state liability applies in any case in which a member state breaches EU law, whatever the organ of the state whose act or omission was responsible for the breach, even the legislature. The courts or the Central Bank could be responsible for the breach. The barristers could be responsible, but they are not an organ of the State. The Legislature, which has failed to communicate the material to the courts, could also be responsible.

Looking at the directive we are dealing with, it is a quite a lengthy document with something like 61 preambles, which are actually part of the law. They have to be read by the judge who is considering the meaning of the terms. I cannot be certain, but having listened to Senator Mark Daly the other day at the Seanad committee, he appears to be of the view that Members do not get a copy of these directives until the statutory instrument is produced. The Oireachtas never had a chance to look at this directive, note it is interesting and decide that there are bits and pieces of it that it should look at as plenary legislation. A decision to go with the plenary route, as opposed to the statutory instrument route, should be made before the paperwork is inked by the Department preparing the instrument. The part of the directive we are interested in, and which is the subject of the discussion today, is way at the back of it. Nobody looks that far through a document. Even if TDs got a copy, they would not have gone as far as reading Article 28. They will have given up, or perhaps they will have had to answer the phone or go to another committee meeting.

If the Dáil had looked at this beforehand and taken advice on it, it would have said, "Hang on. Article 28 relates to amendments to the directive of 2014, which we have already transposed. This is quite important because it includes different language for forbearance. It includes a reference to partial debt forgiveness. This is a significant change in law." That article in itself, which was the only article amending the earlier directive, could have been lifted straight out and transposed in a few weeks. It did not have to wait two years while the rest of the directive gathered dust.

Deputy Pearse Doherty

What are Mr. Honohan's views as to whether the directive should be transposed through primary legislation? If it should, what are the reasons?

Mr. Edmund Honohan

I can give the Deputy an example of this. The last directive we were looking at was the directive of 2014. I will see if I can find it here. I have it here somewhere. I cannot find it now. I have too much paper; that is the problem. There is a provision in the directive, which states that measures should be put in place to ensure the best price be obtained for the mortgaged property, the security property, when it is being sold if a balance is due to the debtor. If a residue is due, that also has to be determined.

Deputy Pearse Doherty

Yes. That is in Article 28.5.

Mr. Edmund Honohan

Yes. It states that measures should be put in place. What measures were put in place for that? That is a hard law provision. One cannot have a measure that can be ignored, dressed up, forgotten about or brushed under the carpet. A measure that is not complied with should be sanctioned. This was transposed, and this is the phraseology used. These are now the regulations that transposed the 2014 directive. Article 29 states:

Where the price obtained for the secured immovable property affects the amount owed by the consumer under the credit agreement, the creditor shall ensure as far as is reasonably practicable that the secured immovable property is sold at the best price reasonable obtainable.

That is a soft law provision, which is not a transposition of what is required under the directive. The directive required "measures" to be taken, so a structure-----

Deputy Pearse Doherty

Yes. I have that article in front of me. The directive stated: "Member States shall have procedures or measures [as Mr. Honohan said] to enable the best efforts price for the foreclosed immovable property to be obtained". Mr. Honohan argues that the transposition of that is a lot softer because it is where practicable and is about just the price. There are no measures or-----

Mr. Edmund Honohan

There is no structure.

Deputy Pearse Doherty

The committee has heard previously that where receivers have been appointed, properties have been sold at very reduced values, with large fees charged also by receivers, and best price, it has been argued, has not been obtained. What is Mr. Honohan's view in that regard?

Mr. Edmund Honohan

The provisions in our regulations, under the 2014 directive, which state that the Central Bank shall supervise or regulate this, are wholly inadequate because there is no question of the Central Bank interrogating each and every sale and publishing its results. For instance, it might be found that a particular receiver has a particularly bad record or that there might be a pattern in the sales a particular receiver or a particular bank was achieving. These are concerns about the possibility that there may well be profiteering taking place: gouging of the borrower and profiteering by the investor. In my view, looking at the new directive and the new provisions for forbearance, we are facing into the same situation whereby any investigation by the Central Bank on forbearance will not produce publicly published material. The decision to employ the Central Bank is one we have taken; it is not one the EU imposed on us. The EU states, "These are the forbearance measures that should be adopted." We could have said, "This is a whole new ball game. Forget about the Central Bank. We will now structure a mechanism for resolution of debt in accordance with the provisions of the directive." That would have required primary legislation. The point about this is that it would involve transparent procedures, everybody would know what was happening and, in that way, the effet utile, as they call it in Brussels, or the effective application of EU law, is secured. I am concerned about going too far in suggesting there is any sort of pattern of underselling, but there is no doubt that an individual who is concerned about this does not appear to me at this point in time to have any access to justice.

Deputy Pearse Doherty

The directive calls for "procedures or measures" to be put in place to get best price. From Mr. Honohan's understanding, from his unique position as Master of the High Court and from the cases he has seen, have there been procedures or measures in any of these cases outside of what anybody would do, which is to put the property on the open market?

Mr. Edmund Honohan

Yes, there have been. Sales have occurred that have not been on the open market. That is why I mentioned market covert in my opening statement. It is concerning because it is quite simple for an auctioneer to say, "The usual gang were asked if they were interested in this piece of farmland or whatever, I did not get any response to my queries, so I sold it off to somebody else."

Deputy Pearse Doherty

However, does the directive not ensure that decision is not left up to the auctioneer or the receiver? It states that member states shall have procedures or measures in place. The question is where-----

Mr. Edmund Honohan

Yes, it does, and a soft law set of regulations will not secure that because it is inaccessible to accountability. I put forward some questions in my opening statement and I have added to them. I now have 20 questions. I was wondering to myself how I could best use my time here and I thought that the best way of doing this would be for me to assist the committee in interrogating the Central Bank. If the Central Bank is the body that will have to oversee or overview this material - and I do not believe the Central Bank wants to overview it - it needs to start thinking seriously about what yardsticks it will apply.

Deputy Pearse Doherty

We have received those questions, and it will be a matter for the committee, but I assume we will ask the Central Bank to answer each and every one of them individually for the committee. It is of benefit as we are scrutinising and reviewing this issue in the context of the credit servicers directive.

What benefit to borrowers derives from this directive and this legislation?

Mr. Edmund Honohan

Borrowers in arrears are in trouble and are now entitled to be offered forbearance terms that are reasonable. One might say they were entitled to that in the first place under the 2019 Act. I remember that Act; Members possibly do not. It went by in a flash and nobody paid any attention to it, but Professor Kenna mentions it in his submission. He says that this set forward a template for assessing how the Circuit Court judge should deal with a possession case or a repossession case. It basically said that, first, in cases where the PIP transaction had failed, he should then consider proportionality as regards the situation that had arisen and that presented itself in court.

The Act also mentioned alternative bodies which might be designated by the Minister as providing a similar mechanism to the PIP but not on an insolvency bases. The great benefit of this directive is that it is not at the courtroom stage that the forbearance engagement takes place. It is supposed to take place before proceedings commence. This is why I call it the new moratorium. Once proceedings commence, they really should be injuncted and stopped if reasonable efforts have not been made. We have a situation where a lender can claim to have made a reasonable offer and is communicating that to the Central Bank. The Central Bank can then say that is okay and invite the lender to issue proceedings. That requires a borrower to go back to court and apply for an injunction on the basis that the offer made was not reasonable and the process undertaken was not in accordance with what the EU expects us to do and not what the Central Bank expects us to do, which is very little. The hard law will kick in before the proceedings commence and that is of immense importance to borrowers.

Deputy Pearse Doherty

If I am a borrower in distress and feel that my lender has not made a reasonable offer, I am looking at this directive and wondering is it a game-changer for me or not. As a layperson, if I am reading this right, I would ask what difference there is, because the language seems the same. The banks, the Central Bank and the Minister will say that all lenders are supposed to engage on a person's ability to pay their credit. The same type of language is in this directive. What is different? Mr. Honohan is saying this is hard law from the European Union that requires a reasonable effort to be made. However, the matter of what is reasonable or not comes back to the judgment of judges at the end of the day. What is reasonable to one judge may not be reasonable to another. There are no explicit rights in this directive that require a borrower to be offered-----

Mr. Edmund Honohan

A certain percentage.

Deputy Pearse Doherty

-----X or Y.

Mr. Edmund Honohan

All law tends to resolve or revolve around a judge's assessment of what is reasonable. That is the process by which the law completes litigation. Decisions must be based on reasonableness. It is clear that at the moment, courts are not engaged, other than in the insolvency situation, with anything other than the paperwork in respect of the title and so forth. Under the new directive, in order to be judicially protecting the rights under the EU law, courts will have to have to get down into the nitty-gritty, granular efforts------

Deputy Pearse Doherty

Does Mr. Honohan believe that as a result of this directive, lenders will have to consider the option of partial forgiveness?

Mr. Edmund Honohan

That is what is states.

Deputy Pearse Doherty

That is what it states. It makes it clear that a suite of options are included. Those include the offer of a payment holiday, partial repayments, currency conversion, partial forgiveness and debt consolidation. One of the problems in this State is that certain providers use some of those measures but none use them all. This hard law now states that a reasonable offer is not a reasonable offer if the lender has not looked at partial forgiveness. Is that Mr. Honohan's interpretation?

Mr. Edmund Honohan

That is absolutely correct.

Deputy Pearse Doherty

As I am conscious others are waiting, I may come in again later. The directive, however, develops a secondary market for non-performing loans. We have seen in recent times the treatment of borrowers by vulture funds compared with mainstream lenders. The interest rate environment is clear in that regard. Is Mr. Honohan concerned that the directive will provide for further securitisation and the growth of the vulture fund market here in Ireland, across Europe and across the globe? This directive allows the purchasers of debt to be anywhere in the world as long as they have a credit servicer somewhere in the European Union. Somebody in Hong Kong could be buying from the next bank to sell its loans. Ulster Bank is going to sell its loans after its agreement with respect to tracker mortgages. Under this directive, those loans could be sold to a credit purchaser in Hong Kong and the credit servicer company could be in Poland. There would be many challenges in such a situation, including language and time barriers and all of that. This is about increasing the secondary market without the consent of the borrower. Has Mr. Honohan any concerns about that?

Mr. Edmund Honohan

I do not, perhaps surprisingly. The bargain being struck in Europe is that there should be a free-flowing capital market and at the same time, the consumers of capital and debt should be entitled to the stipulations of the directive in dealing with mortgage arrears. There should be, if you like, cross-country enforcement of that. In an ideal situation, we would not have a Central Bank that is not engaging with the public and which closes its doors on public inquiries but would have a Central Bank that sets up a private arrangement, a code that would be enforceable, and then allows the matter to be properly litigated.

Deputy Pearse Doherty

That is fine, but the directive takes this into a whole new space where it is not going to be our Central Bank that is regulating these credit service providers. There is no point in talking to the Central Bank any more because this credit directive allows for the central bank in Poland, Italy, Malta or wherever else to regulate. Some have expressed concern that there are different rules and legal and consumer protection frameworks in different European countries and that this directive could allow for a race to the bottom. Why are so many companies regulated in Malta and passported into Ireland and other EU jurisdictions?

Mr. Edmund Honohan

It is not the weather.

Deputy Pearse Doherty

It is not the weather, no.

Mr. Edmund Honohan

Regulatory-----

Deputy Pearse Doherty

Are we now going to have a situation where one's debt can be held by credit service providers in a jurisdiction that has weaker consumer protection rights than we have here, despite all the challenges here, or a different legal framework? They can then be passported in and are not regulated by the Central Bank.

Mr. Edmund Honohan

They are only regulated in the sense that they must comply with the EU directive in that regard.

Deputy Pearse Doherty

Exactly. As we discussed earlier, how we transpose the EU directive is crucial.

Mr. Edmund Honohan

Yes.

Deputy Pearse Doherty

Under this directive, might we see a race to the bottom?

Mr. Edmund Honohan

I am concerned about the Central Bank here. I will flip the coin. I am concerned that the Central Bank will be inundated with applications from credit servicers in Portugal, Belgium and so on to set up shop here. Those credit servicers might leave a telephone number with the Central Bank headquarters and tell officials that is the number on which they can be contacted. The Central Bank will say it does not have the manpower or skills to equip itself to regulate the Portuguese credit service market. There will be a regulatory arbitrage and people will go looking for the lightest touch regulation. I am afraid they are going to come to Ireland.

Deputy Pearse Doherty

I will leave it at that and will come in again later, if that is okay.

Deputy Rose Conway-Walsh

I thank Mr. Honohan for his statement and for the questions he asked, which will be usefully put to the Central Bank. What type of reform to consumer protection law is necessary to protect consumers in the light of the new credit services directive? Some 80,000 people are now paying up to 10% to vulture funds on their primary dwellings. Some 15% of home loans are already in that space. What do we need to do in terms of consumer protection law?

Mr. Edmund Honohan

There is the unfair consumer contract directive of 1993. We were flying high in 1993, which the Deputy is too young to remember. That directive was transposed here in 1995 and nobody paid a blind bit of bother to it. There were a few English cases that were of use. Eventually the Irish courts thought they ought to look at the directive because we had transposed regulations, Irish regulations and not EU regulations, to incorporate it.

There is a list of unfair terms and another list of qualifying criteria. There is also a list dealing with "subject to". One of them is set out in the opening statement I gave. Technically, the consumer has the backing of Brussels and the EU in this area with regard to unfair terms. Fortunately for us, we have a perfect mechanism and architecture here for supervising and enforcing this. The main supervisor is, of course, the Central Bank. We will take a breather here and ask whether we can be serious that the Central Bank is supposed to oversee, monitor, police and regulate these unfair terms. Yes, it is designated by SI 14 of 2000. Has anybody ever seen the Central Bank take an action in court for a declaration as to the suitability or fairness or unfairness of particular terms? The current position on extra interest rates being charged by vulture funds is a classic example of where the Central Bank, wearing its consumer hat if I can put it this way, should be first in the queue down to the Four Courts to say these terms must be looked at rather more carefully than has been done so far.

Deputy Rose Conway-Walsh

Once the directive is transposed, will it provide for the outsourcing of debt collection and enforcement of security that could involve eviction proceedings and so on?

Mr. Edmund Honohan

It is true that debt servicers can appoint agents but they are all subject to the main body of the directive, which is to ensure people who are employed as debt servicers are decent chaps who know how to tie shoelaces and generally behave themselves. These are all venial sins that might be the subject of complaint to the Central Bank. The Central Bank never tells us what is happening.

I do not know whether the Deputy has had a chance to look at the letters I wrote and the replies from the Central Bank. The first reply was in June 2022. There are a couple of very interesting things in it. It related to a particular case where the plaintiff was seeking to secure possession of a piece of land of which it did not even have ownership. It was never mortgaged in the first place but they just misread the file. In paragraph three, the Central Bank stated it could confirm it had, further to my correspondence, engaged with Promontoria on the matter. This is good, is it not? What did the Central Bank say to the company? What was the response? Did it set out a general rule as to what should happen in these cases? Did it say what should happen where there is perjury? No. I do not know whether the Deputy is surprised by this letter in general on the Central Bank's activities; I was surprised.

We mentioned unfair terms and I said that the unfair terms material is not being enforced by the Central Bank and it is happy to let the courts take their own course on this. The courts basically are in a time warp thinking that contract law applies when, in fact, contract law for consumers is now a completely different ballgame. The Central Bank's inactivity in this area gives me cause for concern with regard to credit servicers and purchasers. If this is what they do about unfair terms, what will they do with the servicers? In the document, the Central Bank states that questions as to ownership of title by reference to land registration laws fall outside the competence of the Central Bank. Is that not an admission? It states it will not even look at legal title because it is not part of its remit. It states this several times.

What it said about securitisation was quite interesting. We almost have to read between the lines. First, it tried to explain to me about asset-covered bonds and securities under the 2021 Act. It went on to explain securitisation. It states securitisations are generally structured in a manner whereby an SPV is set up to isolate the securitised loans from the originating bank. It states that when this practice is present in a transaction, then considerations around true sale will be relevant. This is very coy. It flies in the face of what a judge said in a significant case regarding the Bank of Scotland. The judge said that for the system to work, it is absolutely essential that the loan originator should retain the title to the property. Now the Central Bank is saying considerations around true sale will be relevant.

I had asked a specific question of the Central Bank on whether there is any sort of asset-based securitisation in which ownership of the asset is not transferred as collateral. What was the answer to this? It stated that synthetic securitisation would take this form - right. What is the Central Bank saying? It is saying that no other form of securitisation would take this form. All other forms of securitisation involve the transfer of the asset and the only one it can come up with is synthetic securitisation. Mr. Justice McGovern, in a case which went all the way up to the Supreme Court and came back and is being applied throughout the Circuit Court, has been shown to have been poorly informed by counsel who appeared in front of him because this is not the case. That the asset should remain in the name of the originator is not an element. In fact, it is quite the reverse.

Deputy Rose Conway-Walsh

We are speaking about people's homes. When people have paid off their mortgages and they want to get their deeds back, where do they get the deeds from?

Mr. Edmund Honohan

Yes. Good luck with that.

Deputy Rose Conway-Walsh

It is a very serious matter.

Mr. Edmund Honohan

I know that.

Deputy Rose Conway-Walsh

Some people watching are looking at 10%-----

Mr. Edmund Honohan

There is a simple solution.

Deputy Rose Conway-Walsh

They cannot afford to pay their mortgages and as we go down the line, they are in danger of losing their homes. Where are the deeds?

Mr. Edmund Honohan

We do not know. The United States has had ten or 12 years dealing with the chain of title. The title gets chopped up into little pieces and is redistributed and resold. There is a book on it called "Change of Title". What this has resulted in, funnily enough, is the US seeming to be on the ball. There is an article in Duke Law Journal by a Georgetown University professor who states registration also benefits by the preservation of jurisdictional integrity and the creation of adjudicative efficiently. He states foreclosure is a severe remedy that involves the coercive power of the state to deprive a resident of his or her home and that a property interest receives particular solicitude in the law. He states this is precisely the sort of circumstance where there is a societal interest in ensuring the coercive machinery of the state is used appropriately, which necessitates adopting a more reliable source for verifying property rights. The result of what this professor describes is a list of prosecutions in the US of banks for having forged documents, robo-signatures and manufacturing the paperwork they have lost. They have been found out because, for some strange reason, in the US, the legal system works better in the sense of providing equality of arms. There is a list of cases from all of the states back to 2013. I will give an example.

In Vermont, U.S. Bank National Association v. Kimball of 2011 upheld a denial of standing to foreclose because the bank could not demonstrate that it was the holder of the note at the time the foreclosure action was initiated. Actually, there was a decision in the High Court last week or the week before last where the bank had effectively come in and asked the judge “What do you mean we have to have the mortgage deed to produce to the court?” They did not have the mortgage deed and they did not know where it was. This was at the High Court. Why should it get to the High Court? Why did the Circuit Court not spot this? This was unregistered land. The judge said no, the bank was ignoring undergraduate law and that of course it had to have the mortgage deed. That is where we go from here.

To answer the Deputy’s question, the law will allow the owner to proceed as owner even in the absence of the paperwork. If the receiver has signed off on it, then it is a sale by receiver and if it is just paid off to the receiver, he will just withdraw his entry on the register and then you just carry on as before.

Deputy Rose Conway-Walsh

To get it clear in my own head, if you have paid off your mortgage to a vulture fund and want to use your house as collateral to lever credit or whatever, what do you have to prove that the house is yours?

Mr. Edmund Honohan

What is there as proof of that?

Deputy Rose Conway-Walsh

Yes. You obviously have to produce something to say-----

Mr. Edmund Honohan

You have paid over a load of money to a party that is not on the register. That is the key problem.

Deputy Rose Conway-Walsh

So what then?

Mr. Edmund Honohan

The party that is on the register will vacate that charge, or you can apply to have it vacated. In other words, that is the originating bank. They will say we have no problem, you can remove that. We will file a satisfaction piece.

Deputy Rose Conway-Walsh

But you are at its behest to do that.

Mr. Edmund Honohan

You are.

Deputy Rose Conway-Walsh

And is Mr. Honohan saying they could be anywhere in the world?

Mr. Edmund Honohan

The credit purchasers may be anywhere in the world but the point about that is they are availing of a mechanism here to expedite the processing of their claims. It was also referred to in the High Court case I spoke of, Flavin's case, where the judge said in the case of registered charges that they may be able to prove title by reference to the register. There is a big problem there. The register was the vehicle for an obscuring of the true ownership of the burden and has been since early in this whole process. The register states the name of somebody who owns the burden. The section in the Act in relation to register of title suggests on one interpretation that that is conclusive, that is, that the person named as owner is owner to all intents and purposes irrespective of whether there is a credit purchaser who does own it way out in Portugal or some place. We park the Portuguese element and allow the man who is registered, that is, the loan originator, to carry on as if he was the true owner. He comes into court and says that he is the registered owner and therefore he is entitled to his order for possession. But he is not telling the whole truth; he is telling part of the truth. What have we got? At the beginning of this period we had a hullabaloo about strategic defaulters. It was strategic defaulter this and strategic defaulter that and now we have strategic liars.

Deputy Rose Conway-Walsh

We were told at the beginning, when non-performing mortgages were being transferred to vulture funds, that the consumer would enjoy the very same protections as they did with the banks. Is Mr. Honohan telling me that is not the case?

Mr. Edmund Honohan

The key thing is about the interest rate but more generally if I go to the bank and get a mortgage with the bank, I am signing on the dotted line to an Irish institution - my father had an account there, money has changed hands, I might get a car loan from them next year – and I have a relationship with them. Then under the assignment laws, I find that the mortgage has been transferred out and I am dealing with some stranger. On that very superficial level, it is not the same. That is why they had to come out and say “It’s the same. Don’t worry about it. It’s just a name change basically.” But now we have a situation where the same transferee, the assignee, is asserting that he is entitled to change the rate of interest. You might panic and ask how did that happen? The bank is only charging 4.2% and these people are charging 9%. You go back to the small print and it says that it can vary the rate of interest but it has to be “for a valid reason”. That is what has not been litigated by the Central Bank. Can you expect a lay litigant to go into court and say “Judge, I want to rely on the section in the unfair terms contracts", which I set out in my opening statement. It is just impossible to conceive of a case in which a judge will actually entertain a clumsy and poorly framed submission in that regard. There you have a piece of European law and it lies on the table somewhere, below the judge; he has not looked at it and he says, “let’s move onto the next case.”

Deputy Rose Conway-Walsh

I will move on because I am conscious of my time. Is this an issue that is faced by all member states? Have other EU states attempted to resolve the issue?

Mr. Edmund Honohan

It depends on what the issue is. The issue of registration is not one also faced by other member states. It is faced in England, all right, but it is not a member state any more so we are not interested in them. The system of market overt sales is judicially supervised. They are judicial sales. If you go on holidays to Italy and open a local paper, there will be a half-page ad with all the properties that are being sold from under the owners. They are all mortgage sales. They are all fully transparent and public. There is a name for who you contact and so on. That is the system that is operated in Europe. Likewise, you might look at some of the case law. I mentioned a case, it was one of the European cases, where I noted the plaintiff was so-and-so SPV. I thought, “There you go, in Europe they do get the true owner to act as a plaintiff.” Why do we not do it here? It is because of chicanery in the use of a faulty interpretation of the Registration of Title Act. I am not sure if I am boring the Deputy to hell now.

Deputy Rose Conway-Walsh

No. On that, to make it relevant to those most impacted by it, what difference would that make to the homeowner here?

Mr. Edmund Honohan

The fact that we have a peculiar way of dealing with it? It is impossible in most cases for a lay litigant or for any litigant to get behind the title and to find out who the true owner is. You might say, “Ah well, the money is owed anyway,” but, for example, there may be claims against the loan originator which they would like to pursue. That is another part of the directive we are considering today. I do not know if the Deputy has cottoned onto that but it says they actually introduced a new section into the 2014 directive. It is Article 28a, which says, “In the event of an assignment to a third party of the creditor’s rights under a credit agreement, or of the credit agreement itself, the consumer shall be entitled to plead against the assignee [that is the credit purchaser] any defence which was available to the consumer as against the original creditor, including set-off where the latter is permitted in the Member State concerned.” This is new law in Ireland. If you raise your hand in court in Ireland to tell the judge you are not happy with how Ulster Bank dealt with your loan, the other side will say that it is all water under the bridge and you are now dealing with some other entity. If you have a claim with Ulster Bank, good luck to you.

There is new law which should be introduced by means of primary legislation. I will offer a fair bet that nobody will have read that. It will take another ten years before somebody actually manages to get a judge to sit up and take notice that it is possible to bring a claim for an offset against the original lender because of how it messed me around, let me down and so on. That is now to be passed on and to be burdened onto the credit purchasers, who will do due diligence at the time they buy. They will say, "Hang on a second, we are not tying that bundle of documents". This would include cases where there are no mortgage deeds or loan notes. This would look very iffy from the perspective of investors. They might or might not be able to get insurance, but, ultimately, the possibility is that if the Irish system is seen or perceived to be porous in terms of title, then investors will not take up the non-performing loans as a reasonable punt.

Deputy Rose Conway-Walsh

I thank Mr. Honohan.

Deputy Bernard J. Durkan

I wish to ask Mr. Honohan about one or two things he said. Regarding the transposition into Irish law of the directive back in 1993, that would have come before the committee dealing with European affairs and would have been subject to a fair amount of scrutiny. There were several lawyers on the committee at that time, including senior counsel, and it would have been scrutinised. There was a transition in terms of representation there and maybe there was a bit of an overlap. Ordinarily, though, that proposed transposition would have been fairly carefully scrutinised and it would have resulted in scenarios being presented to the members of the committee by a representative duly appointed at the time. These would have involved showing it had a direct impact on the interests of Ireland or that it did not.

Mr. Edmund Honohan

Yes.

Deputy Bernard J. Durkan

Is Mr. Honohan saying this was not sufficient?

Mr. Edmund Honohan

No, I am not. The 1993 directive was passed into Irish law as a regulation in 1995. Again, that was after two years. Since then, it was incorporated into the Consumer Rights Act 2022. The regulation was more or less cut and pasted into that legislation. I am not saying there was anything wrong with the way the Oireachtas dealt with it at the time. We are now 30 years down the road. There can be instances where the Oireachtas can be only too prepared to accept a draft transposition and a draft statutory instrument. This instance we are looking at today is one where the Oireachtas is not even going to be given a chance to look at it.

Another funny story is that I remember once when I got into trouble because I wrote to the Chair of the EU committee here and pointed out the committee was not doing the subsidiarity test that was supposed to be applied to all EU legislation to see if it was going too far, and that we should have been retaining anything we could handle ourselves. The committee was not interested in that and wrote to the Chief Justice and complained about me. I did not get any satisfaction anyway.

Deputy Bernard J. Durkan

In fairness, I should mention that I was the Chair of the committee up to the end of 1992.

Mr. Edmund Honohan

Yes.

Deputy Bernard J. Durkan

No disrespect to anybody, but all legislation was subject to a fairly rigorous test. Before anybody signed off on it, there had to be a declaration by the experts appointed to assess the degree to which it impacted Irish law, people's rights and so forth. Not until that was done could the legislation be signed off on. To be fair to the members of that committee, they did their job and went beyond it on many occasions to poke the bear, as it were, to a great extent.

Mr. Edmund Honohan

Yes. I actually remember discussing this with Charlie Haughey way back in the early 1990s.

Deputy Bernard J. Durkan

Mr. Honohan discussed it with me as well.

Mr. Edmund Honohan

Well, there we go. We are on the same page.

Deputy Bernard J. Durkan

Mr. Honohan left nobody out. However, to turn to the next question, we have a situation whereby the Central Bank was saying these incoming finance companies, vulture funds or whatever were not subject to the Central Bank rules and that they would be sooner or later and so on and so forth. Initially, the Central Bank was saying it had no control over them. At times over the past year, however, the Central Bank has asserted that it does have control and that the vulture funds do have to have regard to the procedures and conditions applicable when a loan was first issued by the original lender. Is that correct?

Mr. Edmund Honohan

Yes. The problem with the credit purchasers the Deputy was talking about is that they were outside the jurisdiction. The Central Bank then said it could not do anything about these credit purchasers if they decided to mess around with the loan book and sell it on because they were outside the jurisdiction. The Minister, Deputy Michael McGrath, then had the bright idea that it was the credit servicers we should be going after and that the local agents here of the credit purchasers in Dublin would be the ones to regulate. This was how the 2015 Act emerged. It was in relation to credit servicers. It still remains the case that it is the credit servicers who are under the cosh, if we wish to put it that.

There is another interesting point I should make about this aspect concerning the notion that soft law and soft regulation could involve the imposition of fines. The imposition of fines on credit services is all right, but I refer to the view that it is not possible to impose fines on the credit purchasers because they have no assets in the country. That is not right because they do have assets in the country. It is just the case that they are not registered as owners of those assets. This is, therefore, another reason why they do not register themselves as owners of the burdens in the Land Registry. It is because they avoid the possibility of having fines imposed on them. This is very technical stuff, but it is the reality.

Deputy Bernard J. Durkan

At this stage, the Central Bank is watching the procedures and how they are operating. I agree that some of the things happened have been all wrong and have put borrowers in a very vulnerable position for many reasons. First, nobody ever knew if the first lender sold on an impaired loan or at what price it was sold at. I understand all the reasons for not disclosing that information. However, subsequently, that buyer could sell it on, again and again, each time with a discount. The borrowers would feel that if some attempt had been made to facilitate them by way of a write-down, or partial write-down, of the debt, that it would have been much easier on all concerned, and there would be no greater loss to the purchaser of the debt.

Mr. Edmund Honohan

Yes. I wrote an article in The Irish Examiner and I mentioned this. In a sense, what would be the best for all concerned would be if the Central Bank would step up to the plate and recognise that it has to play the role of referee. It is the referee between the borrower and the credit purchaser, via the credit servicer, and it must look at both sides and set out rules and procedures that must be followed. If those rules are not followed, the Central Bank must sanction the parties involved.

Deputy Bernard J. Durkan

I am sure that, like me, other members are dealing with several of cases where loans were sold on. The question I raise with Mr. Honohan is who has the deeds of a property. Obviously, the purchaser will have to have the deeds of the property, otherwise, the entity, whatever it is, will have no proper title when the time comes, such as if and when the property is sold again or it has to be registered in any way. Is that not true?

Mr. Edmund Honohan

No.

The Deputy is showing his age now.

Deputy Bernard J. Durkan

I am. Hair colour is not the only thing.

Mr. Edmund Honohan

The whole point about registration is that when the Act was introduced in 1891, people were handing in all this rubbish paperwork - parchments and so on - in the context of determining who owns land. It was then decided to open a big book that would show who owns the land and the paperwork could be shredded. There is no documentary title in respect of registration of land. There is the register.

Deputy Bernard J. Durkan

Generally, there is.

Mr. Edmund Honohan

There are other documents that constitute deeds that change the register.

Deputy Bernard J. Durkan

I have a document that shows the deeds of my house. There used to be the Land Registry. Another agency has some kind of joint function at the moment. What is happening in the market or in repossession cases is that lenders are relying on old-fashioned legislation to be able to go into court and say they have tolerated this long enough, lost X amount of money and it is imperative that they repossess the property, failing to recognise that the poor unfortunate borrower was in the worst possible situation through ten years or more. They go into court on that basis. To be fair, not all judges agree with them. That is one of the weaknesses of this whole argument. Mr. Honohan hinted at it earlier. The transposition would have been better if it had been legislated in detail. Rather than having a case-by-case solution in every case, it would have to be subject to certain criteria laid down in mainstream legislation.

Mr. Edmund Honohan

In one of the suggested questions I have put forward, I pointed to the fact that there are three templates. There is reference to the templates of factors for cram-down in the insolvency Acts, the Land and Conveyancing Law Reform (Amendment) Act 2019 and the SCARP legislation for small SMEs. The Deputy is familiar with that. These are all templates that can be engaged on an algorithmic basis to determine how much a borrower can afford, the timeframe, the cost and so on. The information is put it into the machine and it produces a result. These templates are available, but the directive requires Ireland to create a system which obliges the lender to operate forbearance on the basis of some structure that must be accountable and accessible to the public. When the 2021 directive arrived on a desk in the Department - the Department was involved in the drafting of it anyway - the Department should have realised there was a template in the context of the 2019 Act and it could have been used. It could have been cut and pasted in. There was not that realisation. The Department could have decided to leave it there for two years and then just do a standard reproduction while relabelling the type at the top. I have not seen the statutory instrument that will emerge. I wrote to the Minister to tell him the problem is that we will be going back to the land agent and the foreign land owner. I told the Minister he should not be doing this by statutory instrument. I have not yet seen the statutory instrument but I know he will go down the route of dealing with this by way of statutory instrument because it is the convenient way of doing so. Unfortunately, doing it in that way encapsulates the procedures and legal entitlement in a document the courts will never see.

Deputy Bernard J. Durkan

That is true, but if legislative procedures are put in place - I agree with that - a common template would be required. That would not leave huge variation between the settlements, or lack thereof, as the case may be. What I have discovered through the years is that when a proposition to solve the problem is made by a public representative or a professional insolvency expert, the usual response of lenders, certainly to the politician, is that the proposition is unsustainable. My problem is that according to the lending agency the proposition is unsustainable, but that is not the case from the point of view of showing fair play to the borrower and taking into account the hardship incurred. However, that borrower and all other borrowers offered the lending institutions a far greater level of compassion by way of financial rescue than those lending institutions are now prepared to show to borrowers. That is my objection-----

Mr. Edmund Honohan

That is the Deputy's anecdotal evidence.

Deputy Bernard J. Durkan

I have a lot of it.

Mr. Edmund Honohan

I think we all have a lot of it. The notion of sustainability, which the Deputy raised, is interesting. It has a clear resonance in the context of what the Central Bank stated with regard to setting targets and clearing the arrears cases. It stated that banks should make proposals for sustainable solutions - 80% this year and another 20% next year. Many people thought that would be great and it would be sustainable from the point of view of borrowers, but the Central Bank actually meant sustainable from the point of view of the banks. That is why lenders are saying the propositions are not sustainable. Following the insolvency case of Re Hayes, a debtor, however, the question of what is sustainable for a vulture fund arises? Its money is not coming from the banks but, rather, from the capital markets. I am concerned that the Irish retail banks have exposure in this regard. They are funding some of the vulture funds and some of it may even be proprietary trading. That concerns me.

Deputy Bernard J. Durkan

Other speakers raised the fact that a certain amount of control is exercised in the lending market by the so-called vulture funds by virtue of the fact that they will offer assistance where it suits them. They are very quick to adapt in situations like that, and not in the ways we would like. The point I wish to emphasise before I conclude is that there is a common trend when I make a proposal. I may spend a significant amount of time on the proposal and examine it from all aspects, including those of the bank and the borrower. When it goes forward, I am told by junior officials in the vulture fund that the proposal has gone upstairs for decision. You can be sure the same decision will come back every time. The vulture funds systematically say the proposal is not sustainable - the word "sustainable" comes in there very quickly - and they need payment in full. It is sometimes the case that, in panic, the borrower then goes to another lending institution and manages to get some kind of accommodation which is still insufficient to clear the debt in full but makes the mistake of going back to the current lender and making an offer. Once that offer is made, nothing happens afterwards. All the lending agency wants is full and total repayment and it keeps repeating that. The lending agencies are scaring simple people who borrowed small amounts that have accumulated through the years and turned into large amounts, with penalties involved in some cases. The point I wish to emphasise is that all members of the committee have dealt with them and seen what they can do and the power they wield at all times. It is up to us, as legislators, however, to continue to raise these issues. We should remember that insurance companies have the same attitude. They sell on insurance to another company but the person who took out the policy had no hand, act or part in that transfer and no influence over it. People regularly point out that they took out a policy with a different insurer and ask where that policy has gone and what has happened. I strongly advocate for a template that would apply.

In other words, if a borrower borrowed €10 million, for example, a piece under the scale, was being rushed into receivership or whatever and was forced to sell on to, a few years ago what was a very depressed market and did sell, held the property in place for a couple of years, maybe three to five years, and could afford to do it because of cashflow, and then offered for sale and make a huge profit out of it and nobody ever knows that. Then they come back to the borrower again and they now have the full loan, as originally offered and provided, and they add on interest. The fact is only part of it was paid off and they are now looking for the full and final amount again. It goes around in circles. We need legislation to narrow the degree to which the lending agencies can manoeuvre the borrower into various positions and that should be some kind of template with which they must comply.

Mr. Edmund Honohan

I mentioned the American experience. That was reported by the professor and one of the comments he made was about the paperwork scandal; he called it the paper chase as they could not find it. They have a private registration but it is only 70% accurate, apparently. Investors are completely blindsided by the servicers who say, "we got an offer but we are not satisfied and we will keep collecting money on a percentage basis - on the drip - from the borrowers." The great money-making scam is at the servicers' end and the investors are the ones who are at arm's length and are unable to impose their will on the servicers.

Deputy Bernard J. Durkan

It is to the advantage of investors.

Mr. Edmund Honohan

That is it, yes.

Deputy Bernard J. Durkan

Unwilling to impose.

Mr. Edmund Honohan

They are all carpetbaggers, Deputy.

Deputy Bernard J. Durkan

They did not always work.

Deputy Richard Boyd Barrett

I thank Mr. Honohan for his contribution. I am playing serious catch-up in terms of trying to get my around this. I am perusing the introduction and I apologise for being late. I hope that he understands our difficulty because he said it was quite technical. In his opening statement, as provided, he stated:

Here’s a question you should put to them [I presume Mr. Honohan means the Central Bank]: what reason do they consider “valid” for the purposes of subparagraph (j) of paragraph 1 of the Annex of Terms referred to in Article 3(3) of the 1993 Directive, as scoped at subparagraph 2(b) of the same Annex ?

From that extract, anyone can see my difficulty in trying to get my head around the terminology.

Mr. Edmund Honohan

Or any lay litigant who wants to make the point.

Deputy Richard Boyd Barrett

I like Mr. Honohan's more succinct summary, where he asked "is there ever a 'valid' reason for super normal profits"? These people are carpetbaggers or vultures whose objective is super profits. Is one way to minimise the amount of profit they are allowed to legally make? Can Mr. Honohan talk a little about how much profit they are making? I am not an expert on all this, by any means, and I want him to explain to me, the person who does not fully understand how it all works. The banks sell the loans to these outfits or investors because they have decided that it is too much hassle for them to do a deal with the borrower.

Mr. Edmund Honohan

No, they take a tax write-down.

Deputy Richard Boyd Barrett

Yes.

Mr. Edmund Honohan

So that goes on the profit and loss account. So the banks are happy to let go of these and they sell at a significant discount from face value.

Deputy Richard Boyd Barrett

Yes. Can the investor chase the full value?

Mr. Edmund Honohan

He leverages his investment. He says, "Oh, gosh, this is a good deal here at €10 million, I can put up €2 million and borrow the rest from the retail banks or from others." I mean Goldman Sachs, Blackstone or any of these people. He is looking at a really good return of maybe 15% provided everything runs according to plan.

.

Deputy Richard Boyd Barrett: Is Mr. Honohan talking about the investor?

Mr. Edmund Honohan

Yes. If the investor gets into trouble or there is some hiatus that slows up the cashflow, then he may be subject to margin calls from his banker and that, in turn, might lead to a sell-off of the investment, which is the mortgage-backed security, which, in turn, would lead to some difficulties for the retail bank. Now one has a situation where the Governor of our own Central Bank is saying there is risk of contagion.

Deputy Richard Boyd Barrett

Yes, I get that. What is the answer? It is a disaster for the poor borrowers who are trying to deal and get forbearance. Do we stop the secondary market? Do we stop these vultures outright from being to buy?

Mr. Edmund Honohan

You cannot do that. The banks are entitled, constitutionally, to sell any property they have. You would have to compensate them if you said you can only sell it for a lesser sum or for a sum which is capped in some way. The banks have constitutional property rights too. That is always the difficulty. I always hear Deputies coming up with ideas that people can be forced to do this or that but there are constitutional rights and you would have to compensate them. That is basic.

As I have always said, the solution is for the retail banks to say, "Okay, we will buy these back. You got them at a discount. We will compensate you for a reasonable rate of interest, etc. Just give them back to us and we will now carry on with them as paying mortgages in the Irish sector." There is lots of Irish money out there.

Deputy Richard Boyd Barrett

I agree with that.

Mr. Edmund Honohan

Yes.

Deputy Richard Boyd Barrett

Is that not about driving these vultures out effectively? It is our pillar banks with which we have some flipping relationship.

Mr. Edmund Honohan

You cannot drive them out but you could make them an offer they cannot refuse so they will say, "thanks, we will get the money."

Deputy Richard Boyd Barrett

Whatever language Mr. Honohan wants to put on it.

Mr. Edmund Honohan

That is the way to handle this. It is not correct to say we are oppressed by the vulture funds, at this point. If the EU law was properly administered here-----

Deputy Richard Boyd Barrett

Namely, forbearance. Is that Mr. Honohan's point?

Mr. Edmund Honohan

Namely, forbearance, yes, for people who cannot afford to pay. It is not for everybody. Obviously a person should pay if he or she has contracted to do so. If a person falls on hard times then he or she is obliged to pay what the EU says you should pay.

Deputy Richard Boyd Barrett

Or if they are screwing the person for excessive interest rates.

Mr. Edmund Honohan

Yes, you should not have to pay that.

Deputy Richard Boyd Barrett

Does the directive help in this regard? The issue is that the Government needs to ensure that-----

Mr. Edmund Honohan

Yes. The directive says this system should be in operation. It does not say the Central Bank should use soft law to nudge people into doing the right thing. It says that the State shall oblige lenders to offer foreclosure.

Deputy Richard Boyd Barrett

Forbearance.

Mr. Edmund Honohan

Yes, oblige. The initial wording in the 2014 directive was the State shall "encourage creditors." They went to the trouble of amending that in the 2021 directive and said, change that wording and say the State shall "oblige." That is hard law. There is no other way of getting around that. Why would they change those words if it had no effect whatsoever? It has an effect. It has the effect of telling member states that they should not be using soft-law regulators, as they are subject to regulatory arbitrage and all sorts and are too administrative.

Deputy Richard Boyd Barrett

Again, I apologise to Mr. Honohan if he has gone through this already. Is he concerned that the Government is not going to properly enforce that obligation to offer forbearance?

Mr. Edmund Honohan

It is possible that the Central Bank, having been given the job of regulating, could step up to the plate and say, "Okay, we will regulate in plain view. We are going to set out new code. We are going to have a mechanism for an audience for advocacy." A TD could come in and say, "I have got Mr. McGillicuddy who wants whatever and he has made this offer" and they said "No.".

The Central Bank should then say that it is now recording that and that if there is a pattern, those involved will be fined.

Deputy Richard Boyd Barrett

Because they are not offering the forbearance they should be offering.

Mr. Edmund Honohan

The Central Bank could be the referee, but this is not what the Government is proposing. It is proposing a soft-law mechanism which says that if the Central Bank is happy that things are reasonable, then those involved do not have to tell it about matters and can just it just keep it to themselves. It is, however, something that the EU citizen is entitled to be aware of.

Deputy Richard Boyd Barrett

Again, for the idiot's guide - as it were - how is the Government proposing to proceed with that soft law? Is it in the way it will be transposed?

Mr. Edmund Honohan

Yes. It is just a transposition. The wording used would perhaps be reflective of the content of the directive. Usually speaking, it is done word for word. Sometimes, they come across a difficult one. I started off dealing with the optionality issues. A directive can have optionality. That is a kind of contradiction in terms because the EU is saying that it must be done but then it goes on to say that maybe one thing or perhaps another can be done. That is a matter of legislative policy. If a directive from the EU says that we can do this, that or the other, then a policy decision has to be made. I do not believe the Minister of Finance, the Ministers with responsibility for industry or commerce or some other designated Minister can say "I make the decision on that". It should come to the Legislature.

Deputy Richard Boyd Barrett

So our committee needs to recommend that it is legislated for. Is this what Mr. Honohan is saying?

Mr. Edmund Honohan

It certainly should come before the Oireachtas. Senator Mark Daly was talking about this. The Seanad select committee is only just up and running. It is not really being assisted by the Administration - not the Oireachtas administration, the Government - which is saying that there is a deadline involved, that it cannot be bothered with a Seanad committee and that it should just be signed. That is the reality.

Deputy Richard Boyd Barrett

Okay.

Mr. Edmund Honohan

I do not know if the committee has looked at the Registration of Title Act 1964. The members may be interested in this Act. It was amending legislation. The Registration of Title Act 1891 contained a provision to the effect that "The register shall be conclusive evidence of the title of the owner". That was 1891. In 1964, the Minister of Justice in the Government of the day, Charlie Haughey, amended the whole thing. The corresponding section had a margin note in section 31 of the new Act which stated that it was section 34 of the 1891 Act. If a TD looks at that, he or she might say "Well, that must be okay so. " However, it was not section 34 the old Act. It contained an amendment. Words were inserted to give the impression that the ownership of a burden would be conclusive.

Deputy Richard Boyd Barrett

Right.

Mr. Edmund Honohan

The wording is very bad.

Deputy Richard Boyd Barrett

This relates to the earlier discussion about the asset not moving but the-----

Mr. Edmund Honohan

It is in relation to people saying "I am the registered owner, do not ask me any more, and if you press me on that I will not be able to produce any documents to prove it". I do not know where that came from in the section. I would love to look at the Oireachtas debates that took place in 1963. The point is that the Government could remove those words now. That would eliminate the confusion in the courts. It would not affect the rights of the owners of the mortgages because they would still be entitled to come to court to sue, only not the loan originator would be suing. They would come in themselves as special purpose vehicles and say "We are the owner of the burden and we are suing". The Americans do not want to know, however, and the Irish loan vulture funds do not want to know either. They want to leave it in the hands of the person who is named on the register, but those words could be taken out without damaging anybody's property rights. It is a fascinating piece of legislative history. I leave it with the committee.

Deputy Richard Boyd Barrett

As clear as mud, but I get it.

To return to my original point on profits, does Mr. Honohan believe there is any value in trying to limit or cap the funds' profits? I put that question if view of Mr. Honohan asking if there was ever any valid reason for them to make super-profits?

Mr. Edmund Honohan

Using the unfair terms directive should have the effect of capping their profits because if they come in saying "We want the sun, moon and stars", the directive will provide for looking at the underlying business model, the cost of funds, the commitments to banks and other servicers, etc. It might be found that actually, funnily enough, their costs have not gone up at all and they are not entitled to any more interest. That is how an analysis is done on the basis of proportionality.

Deputy Richard Boyd Barrett

Yes, although in my experience there is often scope for creative accounting of all sorts-----

Mr. Edmund Honohan

No.

Deputy Richard Boyd Barrett

No. Is Mr. Honohan saying that never happens?

Mr. Edmund Honohan

Yes, but is this not what we have a Central Bank for?

Deputy Richard Boyd Barrett

In a different context relating to the financial behaviour of film companies, for example, actors have pointed out that the most creative thing in the Irish film industry is the accountancy. Unless it has a lot of resources to check on the financial position of these companies, will the Central Bank actually be in a position to identify and prevent creative accounting which can allow these entities and these vultures to essentially look for super-profits?

Mr. Edmund Honohan

If one can audit for the purposes of tax, one can audit for the purposes of determining the actual cost of funds. The evidence will have to be produced.

Deputy Richard Boyd Barrett

I thank. Mr. Honohan.

Deputy Mattie McGrath

I thank Mr. Honohan for all his sterling hard work, his availability and his support.

Mr. Edmund Honohan

I thank the Deputy.

Deputy Mattie McGrath

We have tried - both the Chairman and the Rural Independent Group, of which I am a member - have tried to bring forward various items of legislation. On behalf of my colleagues and the Irish people, I thank Mr. Honohan from the bottom of our hearts. Mr. Honohan is the only chink of light in the system.

Mr. Edmund Honohan

That is not right. There is a new understanding on the High Court Bench. I do not want to misrepresent my colleagues here. Once a case gets to the High Court - if it gets past the Circuit Court - those involved they are taking their responsibilities seriously. Unfortunately, some have come in with predetermined views on the notion that the money was borrowed and therefore must be paid back. They can see no justice in denying the right to possession, and that is why it is important to have the EU directive implemented in full.

Deputy Mattie McGrath

I tabled a parliamentary question on that matter to the Minister for Finance some weeks ago. The answer I got back as vague. The Minister is going to sign the directive, but, as I said, the answer is vague. Mr. Honohan can make of that what he will.

I have listened to Mr. Honohan here on Zoom because I was outside at another meeting. How would he view the current position of the Irish courts when assessing or making decisions in cases involving banks, vulture funds and debtors, some of whom are in mortgage arrears? Is it a fair system at the moment or is the system totally skewed in favour of the vulture funds or the banks?

Mr. Edmund Honohan

No, it is not. However, the procedure is skewed. The final outcome is the result of a decision by a judge, but how one gets there is troublesome from my point of view because we have a situation at the commencement of the problem. After the banking crash, I used to handle all the mortgage cases from up and down the country. People would travel from Roscommon, Limerick and all sorts of places. I protested to the then Minister for Justice, Mr. Shatter, and the Government legislated to give jurisdiction to the Circuit Courts. The Circuit Courts now have the jurisdiction to deal with the family homes. Those homes are the subject of home loans legislation. The Circuit Courts are under pressure, and they have a tendency to operate on a kind of production-line basis. An example of that is where the question arises of what they call an own motion assessment of compliance with EU law.

Irish courts say, "What is that?" They say we operate an adversarial system here in which one has to ask for something before one gets it. There has to be a dispute on paper first. European courts do not operate an adversarial system. The judge in a European court will examine the matter even though no one has asked him. He must look to see whether the contract is fair. There was huge resistance to the idea that the courts should have to look by way of own motion at the fairness of the terms. That is an institutional resistance or pushback.

Then the situation arises that if a person loses in the Circuit Court, they go to the High Court thinking they will get a hearing there. The High Court will then say that no new grounds of appeal can be introduced because they were not mentioned in the Circuit Court. The person has, in effect, left it too late. Then the person goes to the Court of Appeal and is told that the High Court hearing was their last shot. I do not think that was ever the intention of the Oireachtas. It is worth noting that all the significant decisions that have produced new thinking on this have come from the Supreme Court. Now we are faced with the situation that very few cases will get to the Supreme Court.

I have a proposal to make. The Supreme Court operates on the basis that it will only hear cases which are of significant public importance of a constitutional nature, or otherwise. That being so, that is a test they have to pass before they are put into, as they call it in America, the docket. They say they will accept the case and hear that because it is a matter of public importance. Straight away, that decision should entitle the litigants, if necessary, to legal aid because the same test applies to legal aid - is the case for which legal aid is required a matter of public importance? Automatically, there should be legal aid available to anybody who wants to appeal to the Supreme Court. That is just a suggestion.

I mentioned in the eight-page letter I wrote that there are a couple of Supreme Court hints, if I could put it that way, that the court wants cases on particular points to come, especially on some of the matters we have been talking about here. It wants to hear these cases but cannot do so. The cases have to come in. The only way to encourage a full interrogation of what is going on in this system is to give legal aid to people who want to bring an action and an appeal to the Supreme Court. It is cumbersome but effective, and it is also in compliance with EU law.

Deputy Mattie McGrath

That is interesting. How can judges make decisions when they do not have access to or sight of the mortgage documents? One would think this is a basic request. Surely the deed and mortgage should be available. Mr Honohan's letter, which I sent around, mainly addressed this issue. How is it acceptable? How can they get away with it?

Mr. Edmund Honohan

The nature of evidence is a matter for the courts. They decide what evidence they will accept as probative of a fact. The Oireachtas passed the miscellaneous provisions legislation in 2020 during Covid - the Covid Act - which allowed for hearsay evidence. This measure was pressed for by the banking community. It said it could not proceed with cases because of Covid. What the banks actually meant was that they could not get the documents. The courts are now empowered to hear hearsay evidence about the mortgage as a fact, without necessarily having to see the documents. This is where we are at. In other words, is the evidence before the court probative of the existence of a mortgage? If so, then there is probably no need to see the mortgage deed because someone has sworn that there was a mortage. That is okay; that is evidence now.

The other evidence that is acceptable is the person is the owner as registered on the register of titles. The register is considered to be evidence as well. It is possible to progress cases of this sort on a paperwork basis only. Imagine the difficulty from a lay litigant's point of view. The person is handed a bundle of papers and told that these are the proofs. The lay litigant has to do the best they can with that. On the day in court, the person protests about price or the circumstances in which he engaged in the mortgage in the first place, or about difficulties in getting a solicitor and all sorts of stuff like that. However, the lay litigant is not really equipped to actually plumb the depths of the paperwork that has been handed to him. Neither is the judge who gets a bundle of papers and asks the defendant if he is expected to read them. The defendant makes such and such a point but he does not really know what he is saying. The judge then says that there is an affidavit which confirms everything and proceeds.

Deputy Mattie McGrath

Is it part of the culture across the river that lay litigants are frowned upon and are an unwanted species in the courts?

Mr. Edmund Honohan

All courts would operate much more smoothly if there were no litigants. That is the way courts are proceeding to develop now. They are going online with submissions and all sorts of written materials. Judges hearing lay litigants are sometimes dismayed at finding that they have to actually pick apart a case being made. They sometimes have to offer advice, as I used to do as Master of the High Court. I used to suggest what the litigants should be saying to me in some instances. They would go away and put it in an affidavit. That was the only way to enable the parties to actually formulate a coherent defence. If they have time, some judges will spot the potential of a particular defence and will encourage the defendant to explore it. Other judges will not do so because they will say the person got the money so where is the injustice? There are several hundred years of moral force behind that idea. If somebody got money, they have to pay it back, but question is, to whom should they pay it back? Is it now statute barred, for example?

Deputy Mattie McGrath

Nothing is simple here but how can we rebalance this situation to have a more level and fair playing field for all litigants and for everyone who has a distressed mortgage, for whatever reason?

Mr. Edmund Honohan

Is the Deputy asking about the court system?

Deputy Mattie McGrath

Yes, in the banking court.

Mr. Edmund Honohan

We should have a system which we might call "Abhaile". I am joking again. A sum of €250 is not going to get legal advice on the sort of topics being discussed here. Legal aid is the only way for the issues which are required to be litigated by the EU to be brought forward. We should be trying to avoid the courts altogether. That is why I hope that in the transposition of that portion of the directive, Professor Kenna's suggestion, that this was an opportunity to create a new architecture for processing and completing the resolution of credit default situations, would be taken up.

We already have this in the case of insolvency. There is creep there. I think the credit purchasers are aware of the fact that they are losing houses. People are going bankrupt and they are holding onto their houses. It could be argued that there is a safe harbour being created for family homes in the insolvency end of the litigation but not in the non-insolvent cases - people who actually do have money. They are not actually bust yet, or over the top. Those are the cases which should be accommodated with equal sympathy.

Deputy Mattie McGrath

I thank Mr. Honohan for his detailed correspondence about the previous correspondence that he sent out to all Oireachtas Members. Was he disappointed with the response or lack thereof?

Mr. Edmund Honohan

No, I was not. This is a public service broadcast on my part.

There is an information deficit here. Nobody knows about this directive. Nobody knows about Article 28 in the directive. The quick method of communicating the advantages of this new moratorium, as I call it, is to communicate it directly to the TDs. They are entitled to know what is going on and they are entitled to get this information at this point and not two or three years down the road when the Central Bank has sorted out what it intends to do with it. This is the point now where TDs can tell their constituents they should go to their solicitors, and if they are not getting reasonable forbearance, they should injunct the lender because they are entitled to have reasonable forbearance offered to them under the EU directive. That is the new law. Its direct effect is that they are entitled to an offer.

Deputy Mattie McGrath

I really appreciate that; I think most people do. We have all had people knocking on our doors and they do not know where to go. The media's lack of interest was another issue that surprised me. Mr. Honohan took the case yonder to New York. If the Chair will allow me, I would like to know how he was received. What did they think of us over there? Did they think we were a basket case?

Mr. Edmund Honohan

It was a lawyer-to-lawyer meeting and we had a number of lawyer jokes-----

Deputy Mattie McGrath

That is allowed.

Mr. Edmund Honohan

-----which cheer us up no end and everybody else asks what we are talking about. It was interesting nevertheless. For example, I introduced them to this notion of what conclusive evidence is. The Irish courts have said what conclusive means is conclusive; that is it. I told them about reading the 1911 Irish Law Reports. When I opened it, I found the case of Murphy v. the King. This is the sort of thing lawyers really love. That case was about the pension that had been granted to Mrs. Murphy. She got it for five months and then she died. Then they discovered the pension was awarded under the section which said that the decision of the pension officer was final and conclusive. After her death the pension officer said that because she was not 70, she should not have got the pension. The Murphy estate challenged the king and said the king was not entitled to get the money back because it was final and conclusive. The court found that to be ridiculous. I will give the full quote:

Mr. O'Connor in his able argument on behalf of the suppliant was obliged to admit that the words "final and conclusive" at the end of subsection 2 of section 7 of the Act cannot be taken in an absolute sense. He admitted that, for instance, in case of fraud, a decision of the Pension Authority could be reopened. There is no allegation of fraud in the present case.

That case, involving five guineas, went to the Lord Chief Justice and all that kind of stuff. The Americans were delighted to hear this sort of thing. It is stuff for after-dinner speeches. The point is that it illustrates the problem of a lay litigant's going into court here in Ireland and saying that just because the loan originator's name is on the register, that is not conclusive. The judge can claim it is because the Act says it is. The lay litigant then asks how he can get around that. There are ways of getting around that. If the person has a lawyer who says that section is now ambiguous, that there are two or more meanings to it, and having identified that there is an ambiguity, an array of mechanisms are available to determine what it actually means.

One of them is contemporanea expositio, which is what it meant at the time the Act was passed. We need to find out what conclusive meant in 1891. It is hard to imagine any lay litigant holding up the judge for another half-day while we discuss the statutory interpretation of this section because it is not as the court has said. That would not happen. A Circuit Court judge would say there is a ruling on this; Judge Baker says it is conclusive and people are stuck with that. That needs to be overturned or the Legislature needs to amend the section, which would eliminate the problem.

Deputy Mattie McGrath

Have the investors learned anything from Mr. Honohan about the-----

Mr. Edmund Honohan

We are very small fry. The Irish investment market is very small fry from the New York perspective. If asked what is happening in Ireland, they simply say they will check with their Irish lawyers and so on. The Irish lawyers are always keen to advise them not to worry and to reassure them that they have the back of the Government and they do not have a problem. If something is proposed from Brussels, they are pretty sure the Irish Government will not jump that way, meaning they are the ones drafting the response. Unfortunately, that is just where we are at.

Deputy Mattie McGrath

I accept that answer. I meant from the point of view of where there is uncertainty about the Land Registry in relation to the debts.

Mr. Edmund Honohan

Investors are only concerned if their investment is at risk. In the capital market they can always sell on an asset on paper to someone else, make a few bob and move into something else like oil shares or something. That is the way they operate in America. I am probably going on too long now. There is a decision of the Supreme Court relating to the OSUS SPV where a derivative action from Bernie Madoff was being litigated in Ireland. The bank wanted to stop it and claimed it was champerty. It is not possible for someone litigate in a case where they did not have any involvement in it. At the outset of the transaction, the person must have had some interest in it, perhaps linked to the property at the time to be allowed to litigate.

In London, they hold their noses and say, "Gosh, we couldn't encourage gambling of that sort." In New York there is no problem with cases where people can buy and sell bits of paper. That is standard finance there. However, here the Supreme Court decided - I do not know why - to follow the English law and say that it would be beneath us to consider such skulduggery as allowing people to litigate on pieces of paper which were the sale of the right to litigate. It is pure speculation. It is like buying a bookie's ticket. The Irish Supreme Court determined it was not right.

I have come across an article by an academic in Belfast who believes the Irish Supreme Court was wrong. Can you imagine that? I came across another academic who graduated from Cork who is now working in Ottawa. He also believes there is a problem with this. These are risks investors face all the time - local laws impacting on their right to recover moneys. At the moment, the possibility that Irish law will bring a halt to the merry-go-round for the investors is not a real risk.

Deputy Conway-Walsh took the Chair.

Deputy Mattie McGrath

I have a statement more than a question. Drug dealers and criminals get legal aid. Surely families trying to keep their homes and trying to provide for themselves and their children should be entitled to legal aid.

Mr. Edmund Honohan

The problem with it is a problem of perception. People say, because these people are not paying their debts, why give them more State money? There is a political risk attaching to that. If I am paying my mortgage, I do not see why my neighbour down the road should get legal aid to fight his case to get a reduction. Unfortunately, from a social point of view, we have to say that is not now something we have to embrace because we are good European citizens and we are going to apply the new directive. Therefore, legal aid is right.

Deputy Mattie McGrath

I thank Mr. Honohan very much for all his work. I wish him a happy, holy and peaceful Christmas.

An Cathaoirleach Gníomhach (Deputy Rose Conway-Walsh)

I think we should point out that if the mortgage was sold off in the first place and did not meet the criteria of a non-performing loan, it should never have been transferred in the first instance.

I need to offer Mr. Honohan a ten-minute break now because we have been going for two hours. Does he wish to take that break?

Mr. Edmund Honohan

Will there be more?

An Cathaoirleach Gníomhach (Deputy Rose Conway-Walsh)

There will be other questions because I know the Cathaoirleach and Deputy Doherty want to come back.

Mr. Edmund Honohan

Thank you very much. I will take the ten-minute break.

Sitting suspended at 3.40 and resumed at 4.04 p.m.

Deputy McGuinness resumed the Chair.

An Cathaoirleach

We will resume in public session. My apologies that I had to leave to attend in the Chamber, but I am thankful Deputy Conway-Walsh took over. I wanted to ask a number of questions. I acknowledge, as did others, the great work carried out by Mr. Honohan in this area and the insights he gives to people in distress of one kind or another with regard to their mortgage or loan. Whether Mr. Honohan likes it or not, he is a hero to them in this regard and someone who throws great light on the issues of the day.

Having listened to Mr. Honohan, I want to go back to the basics. Will Mr. Honohan work through them to give more of an explanation to people like me and other members, who are not up on the law as much as he is but who must apply this very same law, be it European or Irish law, as to their position and circumstances as they appear in court? The bank gives the mortgage or loan and holds the mortgage papers cleared by the legal representatives of both bodies. Everything goes along smoothly with the customer, issues arise and then it is sold to a fund. When that loan is sold to a fund, and I am talking about the main fund and not a service provider or front of house, the paperwork relative to that, including the mortgage paperwork, goes with the loan. Is this is true or false?

Mr. Edmund Honohan

Of course it is true. The paperwork may rest in the same location where it was but the ownership of the paperwork goes to the purchaser of the loan so it can call at any stage, like on an accountable receipt basis, for the loan originator to cough up if the paperwork is transferred.

An Cathaoirleach

So the purchaser - the fund - is taking it for granted that the paperwork is legitimately held by the bank that gave the loan.

Mr. Edmund Honohan

It would usually have done due diligence. It would have gone into a data room and gone through it. I understand some of the earlier transfers of performing and non-performing loans were done on the basis of English lawyers being brought over to look into Irish banks' data rooms, so there is a certain element of checking.

An Cathaoirleach

If the loan is sold again to another fund, the same applies. The mortgage papers are presumed to be there or they can be inspected.

Mr. Edmund Honohan

Money is handed over and the title passes back to the person who is investing in it.

An Cathaoirleach

Where there are complications with the paperwork or there is a stand-off relating to the person who is in the property on the commercial end of it, a receiver can be appointed.

Mr. Edmund Honohan

Yes; not usually with regard to family homes.

An Cathaoirleach

No, but aside from that. I am talking about commercial properties. Those commercial properties might involve a housing estate.

Mr. Edmund Honohan

They could be. A receiver is actually an agent of the borrower. In borrowing the money, the borrower has said to the bank, "You have the right at any stage when there is a default to name a receiver who will now step into my shoes as owner and proceed to sell." That is the role of the receiver.

An Cathaoirleach

Does that happen?

Mr. Edmund Honohan

Yes.

An Cathaoirleach

Not that a receiver is appointed. Does it happen that the receiver acts in the name in the borrower?

Mr. Edmund Honohan

That is how the chain of title is achieved. A sale by a receiver is one way of avoiding the need to go to court. If a receiver is appointed, you can sell as mortgagee in possession and he or she can sign it off. It is a receiver sale. The loan originator does not have to be involved at all, so it does happen. It is the convenience.

An Cathaoirleach

It happens that a receiver is appointed and it happens regularly, but based on my experience, it would appear the receiver is more interested in pleasing the person who is about to take over the property than the person who is in the property.

Mr. Edmund Honohan

Yes. His job as receiver is to realise the asset for the benefit of the lender. He will encash it, deduct his own charges and capital gains tax and so on and so forth, and then remit that to-----

An Cathaoirleach

Are receivers regulated?

Mr. Edmund Honohan

No.

An Cathaoirleach

So they are not regulated, and can do as they please within-----

Mr. Edmund Honohan

Within the common law. Obviously, one could nail them - to coin a phrase - if one found they were acting irregularly, fraudulently, or on the basis of a sale that was not justifiable at the price that was realised.

An Cathaoirleach

Again, it is for the person or people in the property to take that case to the courts.

Mr. Edmund Honohan

Well, yes. They are supposed to sue the receiver, and the receiver will say, "Well I am your agent, so I do not know why you are looking for an award of damages against me because you will have to fund it". There is a bit of circularity there.

An Cathaoirleach

Therein lies a big issue. Is that right?

Mr. Edmund Honohan

It does, yes.

An Cathaoirleach

There seems to be no willingness from anybody to address it, or no willingness for it to be highlighted by those who are central to the knowledge of how it all works.

Mr. Edmund Honohan

Things have moved on. When it has got to the stage where the loan originator has sold it and the receiver is appointed, then the loan originator is no longer interested and will fight to the teeth if someone drags them into a case, collecting their costs against the borrower.

I should say that the sale of the mortgage is not the same as a securitisation. That is different. Securitisation is a funding mechanism being used by the loan originator or by any purchaser. If the loan originator, which is a great new phrase we have now - "the bank" was what we used to call it - decides to sell, he only holds title for a nanosecond. This is because he securitises the asset he has just acquired, which is the mortgage and the commitment to pay on the loan, to a funder, who gives him enough money to replenish what he has paid out to the borrower. That securitisation takes place. If, at a later stage and for whatever reason, the loan originator says that he wants to get rid of this portfolio, then he may well simply transfer what he has got left, including the rights under the securitisation process. He may say to the new owner that they should get their own funder or securitisation partner. The latter is the normal way. One has got an initial securitisation, and then later, another securitisation by the credit purchaser or vulture fund, which also relies on the capital markets for funding.

An Cathaoirleach

I will go back to my bank again, and the person with the mortgage who is a customer in trouble. It is sold on to the vulture fund, and the banks sell that at a knockdown price and they set that off against their losses. Is that correct?

Mr. Edmund Honohan

That is correct.

An Cathaoirleach

So they do not lose.

Mr. Edmund Honohan

Well, it is only the tax liability. With regard to the setting off a loss, there is only a 30% write-off involved there. It is not the full amount.

An Cathaoirleach

No but they set the balance.

Mr. Edmund Honohan

There is a net gain to them in the sense that they now have an asset that they can offset in their tax calculations. That is never taken into account with regard to the borrower. The borrower says, "Gosh, my loan has been sold now and I see the bank has gone and claimed a tax benefit as a result. Surely I should get that, and my net liability to the new owner should be reduced by the fact that the State has returned some of that loss to the bank?"

An Cathaoirleach

The only real loser in this is the mortgage holder, the person who took out the mortgage originally. They more than likely have lost-----

Mr. Edmund Honohan

When the Chair says "loser", obviously the person loses the house if it is repossessed.

An Cathaoirleach

Yes.

Mr. Edmund Honohan

However, they may not have lost in terms of the liability they initially undertook at the time they signed the mortgage.

An Cathaoirleach

True but they lost nonetheless, and is also then faced with having to - if they would want to do it - go to court against the bank while having no money. They are really a class of people who are beaten down by the daunting task of having to face a bank with deep pockets.

Mr. Edmund Honohan

That is a reality. Without legal aid-----

An Cathaoirleach

There is no legal aid there.

Mr. Edmund Honohan

-----they are unable to enjoy equality of arms, which is their entitlement under the European Convention on Human Rights and also under Article 47.

An Cathaoirleach

Bearing in mind "equality of arms", they rely on the judge.

Mr. Edmund Honohan

Yes, one would hope so.

An Cathaoirleach

Not with great success, it would appear, so that is that part of it.

Mr. Edmund Honohan

I think the point that needs to be made, if I could put it in a nutshell, is that the new directive is beefing up the reliefs and the options that are available to borrowers. It is confirming, if confirmation were needed, that the homeowner enjoys something of a safe harbour against creditors. The EU wants that safe harbour to be ring-fenced, and the benefit of it to be given to the borrower. That is what we are hoping for.

An Cathaoirleach

That brings us to today's discussion. Regarding that safe harbour, and the forbearance that Mr. Honohan spoke about earlier on, one would imagine then that it is for the future and the courts to ensure that safe harbour is afforded to as many people as it can who cannot afford to pay their loan.

Mr. Edmund Honohan

That is not my hope. That is EU law.

An Cathaoirleach

That is EU law but in the light of the conversation earlier regarding who tells who about the law, one would hope that someone tells the courts about the law.

Mr. Edmund Honohan

Yes. The second letter I got from the Governor of the Central Bank was dated 20 March, and I thought I would read this out. He says that the question of the conclusive ownership of assets after a true sale securitisation must be assessed on a case-by-case basis. That is an interesting piece of information. Did the Central Bank ever tell the judges that? They have been operating on an entirely different basis.

An Cathaoirleach

What is Mr. Honohan reading from?

Mr. Edmund Honohan

A letter from the Central Bank to me dated 20 March. This is information that the Central Bank is aware of. It is its position on the conclusivity of ownership of the asset after a true sale. It is very coy in that it says it must be assessed on a case-by-case basis. Two questions arise out of that. Why did it not tell the judges that? There is no mechanism for it. Why did the plaintiffs not the tell the judge? They do not understand it either. Then the question is, when is the Central Bank going to do the examination of ownership of assets after a true sale on a case-by-case basis, if that is what is required under EU law? Is the Central Bank ever going to do that, or is it simply going to say, "No, we will walk past the Four Courts. The Four Courts will eventually get around to looking at this but we are not going to bother ourselves".

An Cathaoirleach

That is a reply from the Central Bank to Mr. Honohan?

Mr. Edmund Honohan

It is, yes. From 20 March 2023.

An Cathaoirleach

Okay. Can Mr. Honohan explain to me and everyone the retail credit firms? We have the funds, which have a front-of-house representation. The funds own the loan, the mortgage or whatever it might be, and the service provider is simply managing.

Mr. Edmund Honohan

Yes.

An Cathaoirleach

It is not a bank; it is just a management company.

Mr. Edmund Honohan

Yes. If one looks through the two directives from 2014 and 2021 on credit servicers, one will see the nitty-gritty, how they have to keep cleaned offices, do a post-qualification course, answer the phone and so on. It is standard bureaucratic stuff around how consumers are entitled to be treated. The Central Bank says it understands all of that, and if it gets a complaint, it will look into it but it will not necessarily say what it is going to do about. It is the bureaucratic or administrative end of the completion of the loan transaction.

An Cathaoirleach

However, they are not banks.

Mr. Edmund Honohan

They are not banks.

An Cathaoirleach

They are not entitled, therefore, to increased interest rates.

Mr. Edmund Honohan

As agents for the credit purchasers, they are entitled to administer the contract, which the credit purchasers have with the borrower. Therefore, as agents, they say that they have directions from their boss or whatever or they have been given carte blanche in relation to interest rates, and they can decide to increase them in the hope they get away with it. It is only when we ask where they actually get this calculation that we begin to realise that they are not actually based on any kind of commercial reality in terms of the funding model of the credit purchaser.

Basically, what has happened is that the credit services have said this is great news; they can just say it is because the bank rates have gone up in Europe and everyone will say that they must be right and that because the bank rates have gone up in Europe then, surely, they are entitled to more interest.

An Cathaoirleach

If a person was to invest an awful lot of money in a fund, he or she might get a return of 1%, 2% or 3%. I am talking about the fund itself, depending on what it is. However, this fund is now in a position to increase its chances of huge interest rates by just saying it will increase the interest rates to the European average of, say, 6%, 7% or 9% and, therefore, now, they are really making money.

Mr. Edmund Honohan

No, that is not the way it works. First of all, the initial investor is not getting just 1% or 2% because he or she has leveraged his or her investment. That person is getting 12% or maybe 15%. Then, that person checks with the servicer in Dublin and the servicer will say that it sees that bank rates have gone up so it can add a few percentages points on its own as well. That will also accumulate further riches for the investor.

An Cathaoirleach

Meanwhile, the value of the property right now has gone upwards. They are winning every way. Again, it-----

Mr. Edmund Honohan

Yes, obviously, their investment was at a discount and they are looking forward to actually getting the keys of the place and selling it at a profit. That is a capital gain, which they are now liable for. Apparently, there was a-----

An Cathaoirleach

The unfortunates caught in this cycle at the bottom of all this are the ones whose lives are being destroyed by all this greed and grabbing by those funds.

Mr. Edmund Honohan

I cannot comment on lives being destroyed, although I hear anecdotally about them. I do not actually have any-----

An Cathaoirleach

I have heard about people who have lost their lives because of this. I have heard of people who have taken their own lives because of it. I have heard of families being destroyed because of it. I have heard of individuals, families and businesses who have gone to the courts and have not gotten the appropriate redress. In terms of the quotes Mr. Honohan has given us from the various regulations and so on, they should have gotten a little bit more attention and a little bit more fair play.

Mr. Edmund Honohan

That is exactly why I wrote-----

An Cathaoirleach

Even if it was only the basic redress.

Mr. Edmund Honohan

That is why I wrote to the TDs and Senators to say this is good news and they need to get this out there for people who are feeling stressed even at this stage at Christmas time or whatever or who cannot face the wife. This goes on all the time. With a bit of good news out there, with enough momentum behind it, we might find that they would stay the course. That is what I would hope.

An Cathaoirleach

Okay. What are the non-banking entities that hold 112,000 or 113,000 mortgages?

Mr. Edmund Honohan

They are the ones that are not regulated by the Central Bank of Ireland. They are not retail or high street banks. The Cathaoirleach is quoiting Professor Kenna's analysis here.

An Cathaoirleach

I am what?

Mr. Edmund Honohan

He is quoting Professor Kenna's analysis. Professor Kenna has the figures in that regard.

An Cathaoirleach

Yes.

Mr. Edmund Honohan

That is what the non-banking entities are. They are the new credit purchasers that have bought the portfolios from the banks.

An Cathaoirleach

How do they act then having bought the portfolios from the bank and now owning 113,000 mortgages? They act as a bank.

Mr. Edmund Honohan

They do not act as a bank because they never lend money-----

An Cathaoirleach

No, but they-----

Mr. Edmund Honohan

-----and they do not take deposits.

An Cathaoirleach

No, but in terms of managing these mortgages.

Mr. Edmund Honohan

They appoint credit servicers as their agent. They say that they do not want anything to do with this and they certainly do not want to come to an Irish court, knowing the history of Irish courts.

An Cathaoirleach

They are, therefore, appointing credit servicers.

Mr. Edmund Honohan

Yes, a remote arm's length appointment. The arm's length appointees, who have an Irish legal firm acting for them, will say it is doing the right thing appointing them because they can avail of a little known provision in the land registry Act that says that because their name is on the burden, they do not have to prove anybody else's involvement. They can actually go into court and tell the judge that they are registered as the owner, end of story. Of course, no lay litigant is in a position to say that cannot be right and that they are getting letters from somebody else.

An Cathaoirleach

They are only registered as owners because the mortgages have been sold and, therefore, they are registered as owners.

Mr. Edmund Honohan

No. They are registered as owner of the burden even though the mortgage has been sold on. Therefore, their failure to come back into the registrar and say that, by the way, they were the registered owner of the burden but there is now a new registered owner or new owner should be registered. A failure to record a transaction is a prosecutable offence.

An Cathaoirleach

That is little known.

Mr. Edmund Honohan

Of course it is little known. Unfortunately, that is the nature of the land registry process. It is supposed to be-----

An Cathaoirleach

I know that it is, but my purpose in asking the question is to get the information out to people who do not understand the law fully and who are relying on the likes of me, somebody else or Mr. Honohan to interpret it. They take it then for their benefit and that is fair enough. I will say again that it is a breach of the law. It is necessary that people should be informed of this. That is all I am saying.

Mr. Edmund Honohan

Yes.

An Cathaoirleach

Can Mr. Honohan tell us about synthetic securitisation?

Mr. Edmund Honohan

I cannot really because it is a new phenomenon they introduced. As I said, it is like virtual fundraising without any paperwork changing hands. This whole area of the European capital market is a fast-moving development in Europe and it is going even further because it will have to deal with digital contracts, digital titles, the nature of control over the underlying asset and bitcoins and all that kind of stuff. In England, they have done an immense amount of work in parliament to try to prepare for the arrival of the digital market. We will probably pick up on this in about 20 years. We will still be relying on the Registration of Title Act 1964 and saying that is good enough for us.

I should perhaps also mention that there has been quite an interesting development of which the Cathaoirleach may not be aware. In 2015, the original Consumer Protection (Regulation of Credit Servicing Firms) Act was passed, which set up the standard template for the Central Bank. Then, three years later, legislators came along and amended it. That is very strange. One would have thought they would have gotten it right the first time around. What happened in the amendment? The amendment involved a couple of very small things. However, it involved hanging the description of a credit servicing firm to include the holder of legal title to the credit. Now, it is a complete change. Credit servicing firms obviously had a problem because they were not owners or accepted as being servicers if they owned the loan. The loan originators could not be accepted as servicers if they owned the loan, which they maintained they did. Therefore, they came up with a new formula asking to let them call themselves holders of the legal title to the credit. Conveniently, however, they dropped the words "to the credit". They now come to court and say they are the holder of the legal title. This is another dodge that is utterly confusing to the Circuit Court judge, who will say this seems pretty good and that they have a registered title. They could go on the registered title or go on this other thing saying they have a contract that states they are the holder of the legal title. The judge will say that is grand and he or she will go with that, but it is the holder of the legal title to credit, which is an entirely different thing. There is no such thing in conveyancing as the holder of a legal title. A person is either the owner or he or she is not. A person cannot not be the owner if he or she is the holder of legal title. It is not a conveyancing concept. That we had to introduce this innovation in 2018 seems to suggest to me that there was clear difficulty about servicing firms continuing to act in the careless way they had been acting up until then.

An Cathaoirleach

Is that something that can be linked to hearsay evidence, whereby they say they are the legal owners?

Mr. Edmund Honohan

They produce the contract. The contract will state firm A shall be the holder of the legal title and the judge will say it holds the legal title, but it is meaningless in law. It is simply a label put on it by the contracting parties. It is not a question of the probity of the evidence; it is simply a label passed up to the judge as if it has some significance legally. It does not. In these circumstances, you ask why the provision is in the Central Bank (Amendment) Act 2018, so you are going round in circles. The answer is that because they had a problem with the registration of title, they found another formula to enable somebody to go into court instead of the investor and say they are entitled to the order for possession. I am sorry, but it is weird stuff.

An Cathaoirleach

Mr. Honohan has been here for quite some time now, but I just want to ask again about synthetic securitisation. That has just gone puff.

Mr. Edmund Honohan

So far, we have not been affected by it. The Central Bank did refer to it in the letter just so we would be aware of the fact that there is a developing architecture related to synthetic securitisation. I have met some bankers who said they have been synthetically securitising for a long time, but that has not impacted on court proceedings. Nobody has come down and said they are the owner under synthetic securitisation. They say we do not have to worry about the ownership problem as the proof that you are entitled to the order for possession is in the register of title. The nature of the securitisation can vary quite a bit, including with the new model, which is synthetic. It is just an acceleration of the commodification of debt. The money switches hands left, right and centre. I am advised that "traditional securitisation" is the phrase used. It is recognised that Ireland is still in that old-time web, which is to say we are still on traditional securitisation. I cannot envisage that developing because I do not envisage the retail banks being enthusiastic about incurring further difficulties for themselves concerning the nuts and bolts of the mechanism.

I have another quotation from the article about the paper chase to which I referred earlier. It states:

Courts' behavior should not surprise legal realists. Courts are ruling with one eye on the economic consequences and accordingly are finding ways to preserve legal principles without triggering crises. The mortgage title issue's complex and arcane nature makes it especially easy to find ways to dispose of cases without issuing definitive rulings about which system of title-and-transfer controls, and it is easy to ignore compliance problems as isolated exceptions, rather than the rule ... One way or another, cautious courts are likely to muddle through the legacy problems of existing mortgages.

That is America.

An Cathaoirleach

I have one more question. All of this has to be accounted for. One would presume there are accountancy standards requiring reporting to the regulator on the position of the bank, including on whether it is secure in respect of the regulation. Have the EU accountancy standards changed or obliged us to do more?

Mr. Edmund Honohan

Happily enough, the letter from 9 June 2022 – the first of the letters – states, at the top of page 3 and having regard to generally accepted accounting principles:

While the Central Bank is not the competent authority for accounting standards, the Central Bank expects all regulated entities to adhere to the law and to prepare their accounts in accordance with the applicable accounting standards.

There is an assurance from the Central Bank to me last year that the accounting standards are being adhered to. That is not the case. It is that it has an expectation that they will be adhered to.

An Cathaoirleach

It is not the regulator.

Mr. Edmund Honohan

No, it is not.

An Cathaoirleach

Who is?

Mr. Edmund Honohan

The standard professional bodies for the accountancy firms.

An Cathaoirleach

The representative bodies who break down the understanding of the regulation.

Mr. Edmund Honohan

That is right. And the auditing firms, which do not look anywhere. They ask whether there is anything for them to look at, the answer being, "No, let's go for lunch."

An Cathaoirleach

We could go on about this for a long time. There will be a transcript of the meeting today.

Mr. Edmund Honohan

May I draw the committee's attention to question 20 on the list I have provided, which is quite important? Does the Central Bank accept that its liability shield must be disapplied if EU law is effective and judicially protective? If the Central Bank states that although it is the regulator, it cannot be sued, it leaves us in a situation where EU law is not applied. There is no accountability or satisfaction. That will sound alarms in the Central Bank. It needs to know that its shield against liability, which is standard for all regulators, will go if it takes on the role of hard-law regulation under the new directive.

An Cathaoirleach

There is plenty of food for thought there. Is there anything further that Mr. Honohan would like to add?

Mr. Edmund Honohan

I have a quote from a former chairman of the US Securities and Exchange Commission. In his book Take on the Street, he wrote:

During my seven and a half years in Washington ... nothing astonished me more than witnessing the powerful special interest groups in full swing when they thought a proposed rule or piece of legislation might hurt them, giving nary a thought to how the proposal might help the investing public. With laserlike precision, groups representing Wall Street firms, mutual fund companies, accounting firms, or corporate managers would quickly set about to defeat even minor threats. Individual investors, with no organized lobby or trade association to represent their views in Washington, never knew what hit them.

This is just an indication of the perception in New York as to how the operatives in the financial world operate.

An Cathaoirleach

It must be contagious because I have seen it here.

Mr. Edmund Honohan

Yes, that is it.

An Cathaoirleach

It has travelled fairly quickly.

I appreciate Mr. Honohan's attendance. I am sorry for the delay I created. It certainly has been an experience to sit here and go through these matters with him. I encourage him, as Master of the High Court, to continue to highlight these issues for us. We will go back over the transcript and see what further work we can do on this. The final quotation puts everything in perspective. I thank Mr. Honohan.

The joint committee adjourned at 4.39 p.m. sine die.