The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015, was introduced on the 8 July 2015. The Act created a new type of regulated entity being a “Credit Servicing Firm”.
The purpose of the legislation was to ensure that borrowers, whose loans are sold by a regulated entity to a currently unregulated entity, maintain the same regulatory protections as they had prior to the sale.
In December 2015 the Central Bank published the Authorisation Requirements and Standards for Credit Servicing Firms. This publication has detailed the requirements of the Central Bank for a Credit Servicing Firm to secure and maintain its authorisation as Credit Servicing Firm.
Who does this affect?
- Credit Servicing Firms/Loan Portfolio Management Companies
- The legal owners of loan portfolios
- Consumers whose loans have been sold to third parties
- Lending institutions involved in or contemplating the sale of loan portfolios
- Private Equity funds involved in or contemplating the purchase of loan portfolios
In July 2015 the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the “2015 Act”) was introduced, and created a new type of entity which would be regulated by the Central Bank of Ireland (the "Central Bank") called a "credit servicing firm". The primary purpose of the legislation is to extend the benefits of consumer protection for bank customers whose loans were acquired by NAMA during the crisis and then sold to unregulated lenders.
The Act requires the administration of loan books acquired by unregulated lenders to comply with the same statutory consumer protections that apply to banks that are regulated by the Central Bank.
The Act contains transitional arrangements for firms that were in operation at the time of enactment in July 2015 and which applied for authorisation to the Central Bank by 8 October 2015.
In December 2015 the Central Bank of Ireland released its Authorisation Requirements and Standards for Credit Servicing Firms (“the Standards”). Its publication adds the meat to the bones of the Act in that it is now transparent as to what, on a practical level, is required for a credit servicing firm to secure such authorisation and to maintain its status as a Credit Servicing firm.
The Standards have set out at Part A, under 10 separate headlines, the Authorisation Requirements which must be met by Applicants to hold an authorisation as a Credit Servicing Firm;
- General Authorisation Requirements
The applicant must be able to demonstrate that its organisation structure is capable of being supervised by the Central Bank. It stipulates that effective control of the firm would rest within the state and factors (a) to (f) are listed as being relevant for consideration as regards where control of the firm rests.
- Professional Indemnity Insurance
PII is necessary to secure against liability arising from professional negligence. The level of PII is stipulated as being 1.25 million Euro per claim, and 1.85 million Euro in aggregate cover in a single policy period.
This provision also carries a stipulation that were the PII policy includes an excess provision, the Credit Servicing firm must be able to demonstrate an ability to pay this excess without impacting on the viability of the Credit Servicing Firm.
- Organisation and Management
“The Credit Serving Firm is required to demonstrate that it is in a position to conduct its business affairs in a manner that ensures that the best interests of customers are protected”.
Satisfactory governance arrangements must be in place, with inter alia “defined, transparent and consistent lines of responsibility and accountability". Effective internal control measures, including internal audit function must be demonstrated, with a compliance function and an appointed Compliance Officer.
- Minimum Competency Requirements
Individuals employed by a credit services firm are required to satisfy and comply with the Central Bank's minimum competency requirements.
Individuals who participate in the direction and management of a Credit Servicing Firm require to be pre-approved for the role by the Central Bank (known as Pre-Approved Control Functions PCFs'). Individuals in this category include the board of directors, the CEO, and Head of Compliance.
Most other roles in a Credit Servicing Firm comprise control functions (known as CFs) and these individuals require training and supervision of their day to day work in compliance with the relevant consumer protection codes.
- IT Systems
An adequate IT system must be in place to support the Credit Servicing Firm with data protection, disaster recovery and business continuity measures.
- Relationship with the Central Bank
Similar to other regulated firms, a Credit Servicing Firm must be co-operative and open in its dealings with the Central Bank, including the provision to the Central Bank of audited accounts and to comply with the reporting requirements of the Central Bank. There is an ongoing requirement to keep the Central Bank appraised as regards the servicing of any new loan portfolios, and equally there are requirements placed on the Credit Servicing Firm should that firm decide to cease credit servicing activities.
A substantial provision within the Standards relate to the ownership of the Credit Servicing Firm, and changes to that ownership structure. As with any regulated body, the ownership and control of the body must facilitate effective regulation in terms of enforcement, and therefore effective control of the firms rests within the state.
The standards state that a Credit Servicing Firm will “…. not outsource activities to any extent that would impact on its ability to meet all applicable regulatory requirements.”
We understand this to mean that a firm will not outsource an important operational function, including key administrative activities or financial performance.
Subject to these overriding requirements a firm may apply to the Bank to outsource IT services and delegated administrative tasks.
Typically, a firm may not outsource any functions within the first year of operation.
- Relationship with Loan Owners
The holder of the legal title for the loans must be disclosed to the Central Bank, and an agreement must be in place between the Credit servicing Firm and the loan owners that enables the Credit Servicing Firm comply with all obligations under financial services legislation. This is an important provision as it protects Credit Servicing Firm from undue pressure to potentially apply certain procedures directed by the unregulated loan owner that may not comply with legislative requirements, and to do so would be a breach of that agreement by the loan owner.
- Record Keeping
Appropriate records must be kept by the Credit Servicing Firm, and an extensive list is provided at (a) to (i) of provision 11.1 of the standards, however this is not an exhaustive list.
The records must be kept for a period of 6 years from the date of the last interaction with the borrower or the date on which the Credit Servicing Firm ceases to provide credit servicing to the loan owner.
It is clear from the above summary of the Standards that this new regulated environment which Credit Servicing Firms will be operating is both broad in its scope and specific in nature. As a consequence the business structure employed by many existing Credit Servicing Firms may require comprehensive review and remediation to secure and maintain authorisation. If the Standards cannot be met and authorisation secured the business in question cannot perform credit servicing on behalf of a loan owner.
In some instances the viability of a business may be compromised as a consequence of the introduction of the Standards. But for other Credit Servicing Firms the requirements of the Standards may not impose a significant burden.
The beneficiary of this new regulated environment will be the consumer, and borrowers whose residential mortgage loans have been acquired by previously unregulated entities.
In almost all circumstances where loan portfolios have been acquired, a significant portion of those loans have been in arrears of mortgage repayments. The Act and Standards now place borrowers, whose loans have been sold, on an equal footing to borrowers whose loan remain with its originating lending institution in terms of consumer protections that can be relied upon. A borrower is rarely ever as reliant on the statutory consumer protection codes at any point as they are when a loan is in default, and therefore this legislation must be received very positively by borrowers in such circumstances.