On 2 July, the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015 (the ‘Bill’) was declared passed by both Houses of the Oireachtas (the Irish parliament). It is expected to be signed by the President and enacted into law in the coming days. The new legislation is designed to protect consumers upon the sale of consumer loan portfolios to unregulated entities. It proposes the creation of a new type of regulated entity called a ‘credit servicing firm’.

1. What is the purpose of the new legislation?

The new legislation is designed to protect consumers upon the sale of consumer loan portfolios to unregulated entities. In particular, it seeks to protect consumers whose loans are sold to an unregulated entity in a situation where that entity either undertakes the servicing of the acquired loans itself or appoints a loan servicer to service the acquired loans on its behalf. It also proposes the creation of a new type of regulated entity which will be known as a ‘credit servicing firm’.

2. What credit agreements fall within the scope of the new legislation?

The new legislation is designed to protect consumers and accordingly it does not cover all types of credit agreement. Protection will be given to consumers who are classified as ‘relevant borrowers’ under a ‘credit agreement’ where a ‘credit servicing firm’ undertakes ‘credit servicing’ activities. For this purpose, a ‘credit agreement’ means an agreement whereby a creditor grants, or promises to grant, credit to a ‘relevant borrower’. A ‘relevant borrower’ means:

  • A natural person within Ireland (unless that natural person is a regulated financial service provider or it is, or it satisfies the criteria to elect to be treated as, a professional client for the purpose of the MiFID Regulations); or  
  • A micro, small or medium-sized enterprise but only to the extent that the credit granted to it under the credit agreement concerned was provided by a financial service provider authorised by the Central Bank of Ireland (“CBI”) (or an authority that performs functions in an EEA country that are comparable to those performed by the CBI) to provide credit in Ireland.

3. How is ‘credit servicing’ defined in the new legislation?

The new legislation defines ‘credit servicing’ in relation to a credit agreement as managing or administering the credit agreement, including:

  • Notifying the relevant borrower of changes in interest rates or in payments due under the credit agreement or other matters of which the credit agreement requires the borrower to be notified  
  • Taking any necessary steps for the purposes of collecting or recovering payments due under the credit agreement from the relevant borrower  
  • Managing or administering any of the following:
    • repayments under the credit agreement
    • charges imposed on the relevant borrower under the credit agreement
    • errors made in relation to the credit agreement
    • complaints made by the relevant borrower
    • information or records relating to the relevant borrower in respect of the credit agreement
    • the process by which a relevant borrower’s financial difficulties are addressed
    • any alternative arrangements for repayment or other restructuring
    • the assessment of the relevant borrower’s financial circumstances and ability to repay under the credit agreement
  • Communicating with the relevant borrower in respect of any of the above matters

The new legislation also lists certain activities that are excluded from the definition of ‘credit servicing’ in circumstances where those activities are undertaken by a holder of legal title to credit in respect of a portfolio of credit agreements or a person/firm acting on behalf of the holder (provided those activities are not undertaken in a manner which would breach designated financial services legislation if undertaken by a regulated financial service provider). The excluded activities are:

  • Determination of the overall strategy for the management and administration of a portfolio of credit agreements  
  • The maintenance of control over key decisions relating to such portfolio  
  • Taking such steps as may be necessary for the purposes of enabling the undertaking of credit servicing by another person/firm or enforcing a credit agreement

These exclusions effectively limit the definition of ‘credit servicing’ to day-to-day loan servicing activities. They are designed to avoid a situation where the activities of an unregulated entity which acquires a consumer loan portfolio, and which appoints a credit servicing firm to undertake the day-to-day servicing of that loan portfolio, would also fall within the definition of ‘credit servicing’ by virtue of its role in appointing and setting the strategy of the credit servicing firm, overseeing its activities and being party to any enforcement action.

4. What is the definition of a ‘credit servicing firm’?

The new legislation defines a ‘credit servicing firm’ as:

  • A person/firm (other than the National Asset Management Agency (“NAMA”) or a NAMA group entity which:
    • Undertakes credit servicing other than on behalf of a regulated financial service provider authorised by the CBI (or an authority that performs functions in an EEA country that are comparable to those performed by the CBI) to provide credit in Ireland; or
    • Holds the legal title to credit granted under a credit agreement in respect of which credit servicing is not being undertaken by a person authorised to carry on the business of a credit servicing firm; and
  • A regulated financial services provider that is deemed to be authorised to carry on the business of a credit servicing firm because it is authorised, whether before or after the coming into operation of the new legislation, by the CBI (or an authority that performs functions in an EEA country that are comparable to those performed by the CBI) to provide credit in Ireland.

5. Are there particular risks in relation to the new legislation that an unregulated entity acquiring a loan portfolio should guard against?

One of the key risks that an unregulated entity acquiring a loan portfolio should guard against is not to inadvertently do or omit to do something which would trigger a requirement for it to be authorised as a credit servicing firm. For example, unregulated entities will be required to obtain authorisation as a credit servicing firm where:

  • The unregulated entity acquires a consumer loan portfolio and does not appoint an appropriate regulated entity to undertake credit servicing activities on its behalf in respect of the consumer loans; or  
  • The unregulated entity acquires a consumer loan portfolio and appoints an appropriate regulated entity to undertake credit servicing activities on its behalf but the unregulated entity undertakes day-to-day credit servicing activities which fall within the definition of ‘credit servicing’ under the new legislation.

With regard to potential risks, it should also be noted that the new legislation prohibits a person/firm which holds the legal title to credit granted under a credit agreement from instructing a credit servicing firm to take or fail to take an action, if the taking of or the failure to take the action would otherwise breach designated financial services legislation if a retail credit firm took or failed to take that action. Breach of this requirement is a criminal offence under the new legislation. 

6. What are the new authorisation requirements for credit servicing firms?

When the new legislation comes into operation, there will be a new type of regulated entity called a ‘credit servicing firm’. Entities falling within the scope of the new credit servicing regime will be required to apply for authorisation from the CBI under Section 30 of the Central Bank Act 1997 (as amended) and they will be regulated and supervised by the CBI. We expect that, shortly after enactment of the new legislation, the CBI will publish an application form for the purposes of obtaining authorisation as a credit servicing firm, together with official guidance on the application process and requirements. It should be noted that it is a criminal offence for an entity to carry on regulated financial services business in Ireland without the required authorisation.

7. What transitional arrangements will apply to existing firms which carry on the business of a credit servicing firm?

The new legislation will include a transitional regime of interim authorisation for existing persons/firms (other than those which are deemed to be authorised to carry on the business of a credit servicing firm in the circumstances outlined in question 4) carrying on the business of a credit servicing firm. A person/firm carrying on the business of a credit servicing firm immediately before the coming into operation of the new legislation is taken to be authorised to carry on the business of a credit servicing firm until the CBI has granted or refused authorisation, provided that the person/firm has applied to the CBI for authorisation no later than three months after the legislation comes into operation. The new legislation provides that during the transitional period, the CBI may impose regulatory and supervisory conditions or requirements upon such firms and may direct such firms not to carry on the business of a credit servicing firm for a specified period not exceeding three months.

8. What other protections will the Bill provide to consumers whose loans are sold to unregulated entities?

When the new legislation comes into operation:

  • Upon the sale of a consumer loan portfolio to an unregulated entity, the relevant borrowers will continue to enjoy the benefits of CBI Codes designed to protect consumers (including the Code of Conduct on Mortgage Arrears).  
  • Upon the sale of a consumer loan portfolio to an unregulated entity, the relevant borrowers will have access to the Financial Services Ombudsman complaints procedure regarding treatment by credit servicing firms.  
  • As regulated entities, credit servicing firms will be subject to supervision and enforcement by the CBI.

9. What is the anticipated timing for enactment of the new legislation?

The Bill was declared to have been passed by both Houses of the Oireachtas on 2 July 2015. It is expected to be signed by the President and enacted into law in the coming days. Since the Bill does not contain a specific commencement provision, it will come into effect immediately upon the President signing it.