Background for legislative reform
Over the last 18 months there has been significant media coverage and public debate about some Irish borrowers losing various regulatory protections where their loans have been sold to an unregulated entity; a recent phenomenon as Irish credit institutions continue to deleverage and sell off non-core business lines and non-performing loan portfolios.
While many unregulated purchasers have voluntarily agreed to apply the Central Bank’s Code of Conduct on Mortgage Arrears, the Consumer Protection Code and the Code of Conduct for Business Lending to Small and Medium Enterprises (the “Codes”) when managing their loan books, voluntary compliance is not enforceable by the Central Bank of Ireland. In addition, access to the Financial Services Ombudsman (the “FSO”) in respect of complaints against the new lender is not currently possible.
After a public consultation by the Department of Finance, the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015 (the “Bill”) was published on 14 January 2015 to address these issues. The Bill now appropriately seeks to regulate the actual day-to-day servicing of the loans and the entities who engage in borrower-facing activities (similar to the position in the UK) rather than the actual owner of the loans which can often be a tax efficient special purpose vehicle or fund.
The Bill seeks to ensure that where a regulated entity sells its Irish consumer or SME loan book, the affected consumers and SMEs will continue to enjoy the same regulatory protections as they had prior to the sale including under various Codes applicable to a regulated seller and will have access to the complaints procedure of the FSO, if necessary. The protections will apply to consumers regardless of when the loans were drawn down, thus providing complete certainty to all customers. Subject to the legislative programme, the Bill is expected to pass into law in early 2015.
Q: What has changed?
In short, the Bill, when enacted, will require firms that manage and administer loans advanced to natural persons and/or SMEs to be authorised and regulated by the Central Bank of Ireland (“CBI”). In addition, any loan purchaser who does not outsource the managing or administration of such loans to a regulated servicer will be required to be directly regulated by the CBI. The definition of credit servicing in the initial draft of the Bill is quite broad and includes activities such as:
- Notifying the borrower of changes in terms and conditions;
- Taking steps for the purposes of collecting or recovering payments due; or
- Managing or administering repayments, charges, errors, complaints, underwriting, restructuring, borrower communications and information or records relating to the borrower.
Q: How will this Bill impact unregulated purchasers of Irish consumer loan portfolios?
Purchasers of Irish consumer or SME loan portfolios, including Irish Section 110 SPVs, will need to appoint a regulated servicer. Alternatively, if they do not outsource the management or administration of their loan books to an authorised firm then they will need to seek authorisation as a credit servicing firm themselves.
A typical loan purchaser (e.g. an SPV) should not require a separate authorisation if it outsources the loan servicing function as there is a carve-out for the following functions typically retained by a lender/loan purchaser with respect to a loan portfolio including:
- The determination of overall strategy for the management and administration of the loan portfolio;
- The maintenance of control over key decisions relating to such loan portfolio;
- Taking steps for the purposes of enabling the undertaking of credit servicing by another person; and
- Enforcing the relevant credit agreements.
Q: I am (i) a credit servicing firm or (ii) a lender of record with no regulated servicer. What do I have to do?
The Bill currently provides for a 3 month transitional period during which a firm engaged in the activity of credit servicing must apply to the CBI for authorisation. Accordingly appropriate legal and regulatory advice should be obtained by loan servicers and unregulated loan book purchasers who have not outsourced their credit servicing prior to the enactment of the legislation.
The full text of the Bill may be accessed here.