Since the establishment of the Single Supervisory Mechanism (SSM) in November 2014, the focus has shifted from reducing mortgage arrears levels to reducing Non-performing Loans (NPLs). This shift in focus has been accompanied by a new strict definition Europe-wide of what constitutes an NPL by the European Banking Authority (EBA) which means that certain restructures are deemed NPL even if customers are meeting the revised payment schedule.
Officials in my Department met with staff of the SSM at the highest level on two occasions since late 2016. In the course of their discussions they outlined the background and history to the restructuring effort in Ireland and questioned the logic of now classifying some types of restructured loans, including certain split mortgages, as NPL indefinitely. While my Department has been informed that the SSM is looking into the regulatory treatment of split mortgages across a number of European member states I have no evidence at this point that this categorisation is going to change. Banks may be able to reduce their NPLs to levels acceptable to the SSM without the requirement for loan sales and/or the loan sales involving restructured mortgages.
I have been advised by the Central Bank of Ireland that as per the EBA Implementing Technical Standards on supervisory reporting and the ECB Guidance on non-performing loans, non-performing exposures are those that satisfy either or both of the following criteria:
1. material exposures which are more than 90 days past-due;
2. the debtor is assessed as unlikely to pay its credit obligations in full without realisation of collateral, regardless of the existence of any past-due amount or of the number of days past due.
There are instances where an exposure can remain a non-performing exposure, notwithstanding the fact that there are agreed forbearance terms with a lender and the borrower is meeting those terms. This can include instances attributable to the criteria outlined in point 2 above.
Again to reference the EBA Implementing Technical Standards on supervisory reporting;
When forbearance measures are extended to non-performing exposures, the exposures may be considered to have ceased being non-performing only when all the following conditions are met:
1. the extension of forbearance does not lead to the recognition of impairment or default;
2 one year has passed since the forbearance measures were extended;
3. there is not, following the forbearance measures, any past-due amount or concerns regarding the full repayment of the exposure according to the post forbearance conditions. The absence of concerns has to be determined after an analysis of the debtor’s financial situation. Concerns may be considered as no longer existing when the debtor has paid, via its regular payments in accordance with the post-forbearance conditions, a total equal to the amount that was previously past-due (if there were past-due amounts) or that has been written-off (if there were no past-due amounts) under the forbearance measures or the debtor has otherwise demonstrated its ability to comply with the post forbearance conditions.
These specific exit criteria shall apply in addition to the criteria applied by reporting institutions for impaired and defaulted exposures.
The full ECB guidance on NPLs and the EBA Implementing Technical Standards are published here:
https://www.bankingsupervision.europa.eu/press/pr/date/2017/html/sr170320.en.html
https://www.eba.europa.eu/documents/10180/449824/EBA-ITS-2013-03+Final+draft+ITS+on+Forbearance+and+Non-performing+exposures.pdf
As the Deputy will be aware, most loan agreements include a clause that allows the original lender to sell the loan on to another firm. The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (“the 2015 Act”) was introduced to fill the consumer protection gap where loans are sold by the original lender to an unregulated firm. Under the 2015 Act, if the firm who bought loans from the original lender is an unregulated firm, then the loans must be serviced by a ‘credit servicing firm’ which is regulated by the Central Bank. Credit Servicing Firms are typically firms that manage or administer credit agreements such as mortgages or other loans on behalf of unregulated entities.
Credit servicing firms must act in accordance with the requirements of Irish financial services law that applies to ‘regulated financial service providers’. This ensures that consumers, whose loans are sold to another firm, maintain the same regulatory protections that they had prior to the sale, including under the various statutory Codes of Conduct issued by the Central Bank such as the Consumer Protection Code 2012, Code of Conduct on Mortgage Arrears 2013, and the SME Regulations. Contractual terms are not changed by the sale of the loan.
Provision 3.11 of the Central Bank’s Consumer Protection Code 2012 (the Code) requires that, where a regulated lender intends to transfer all or part of its ‘regulated activities’ to another regulated entity, it must provide advance notification to both the Central Bank and affected consumers. Specifically, a lender must provide a consumer with at least 2 months’ notice before transferring all or part of its loan book covered by the Code to another person, including where the transferee is an unregulated entity. Where the transferee is an unregulated entity, the Code requires that the regulated lender also notify the consumer of the name of the regulated entity that will be ‘servicing’ the loan for the unregulated entity. In the event that there is a change in the credit servicing firm, the existing credit servicing firm must also notify the Central Bank and the consumer in advance, in accordance with the timelines set out under Provision 3.11 of the Code.
A Government Decision last week agreed to support the FF Private Members Bill in relation to the regulation of loan owners. The Government will work with Deputy McGrath and the House to improve the Bill, with a view to addressing any difficulties that might arise with it as currently drafted. I have also asked the Central Bank to carry out a review of the Code of Conduct on Mortgage Arrears (CCMA) to ensure it remains as effective as possible and for the review to be completed as soon as possible.
