In January 2015, the Department of Finance published a first draft of the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015 (the Bill).
The Bill is the result of a consultation process that started with a Consultation Paper in July 2014 on the Sale of Loan Books (the Consultation Paper), to which the Department of Finance received 18 submissions. The Consultation Paper was, at least in part, a response to media comment in relation to the purchase by so called 'vulture funds' of portfolios of mortgage loans from, amongst others, the Irish Bank Resolution Corporation Limited (IBRC). One of the concerns raised was that borrowers would lose the protection of financial services legislation, including the Central Bank statutory codes of conduct (especially the Consumer Protection Code and Code of Conduct on Mortgage Arrears) as a result of the assignment of their loans.
The result of the Consultation Paper is, perhaps surprisingly a Bill with its primary focus on the regulation of the servicers of credit rather than the owners of the credit. The Bill creates of a new category of regulated business in Ireland, that of credit servicing. Once a holder of loans has appointed a credit servicing firm to service its loans, it does not need to be regulated.
How does regulation of credit servicing protect consumers?
Most of the purchasers of mortgage loans are unlikely to possess the administrative capability necessary to deal with portfolios of thousands of mortgage loans. In order to manage their investment they will need to either employ the bank from whom they purchased the loans or a professional mortgage loan servicer to manage the day-to-day administration of their loans (calculations of accruals, notifications of changes of interest rates, etc.). Providers of this service are, in general, carrying out the administrative tasks in accordance with a specific set of directions from the holders of the loans.
The definition of credit servicing under the Bill is extensive but can be defined generally as "managing or administrating the credit agreement". Specifically the following activities are defined by the Bill as 'credit servicing' -
- 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 relevant 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:
3.1 repayments under the credit agreement;
3.2 any charges imposed on the relevant borrower under the credit agreement;
3.3 any errors made in relation to the credit agreement;
3.4 any complaints made by the relevant borrower;
3.5 information or records relating to the relevant borrower in respect of the credit agreement;
3.6 the process by which a relevant borrower's financial difficulties are addressed;
3.7 any alternative arrangements for repayment or other restructuring;
3.8 assessment of the relevant borrower's financial circumstances and ability to repay under the credit agreement; or
3.9 communicating with the relevant borrower in respect of any of the matters referred to in paragraphs (1) to (3).
The Bill also provides that credit servicing does not include any of the following:
- the 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, or
- taking such steps as may be necessary for the purposes of -
- enabling the undertaking of credit servicing by another person, or
- enforcing a credit agreement.
The Bill further states that if the activities listed at (a) - (c) are undertaken by a person who holds the legal title to the credit agreements, the activities must not be taken in a manner that if it were so taken by a regulated financial services provider, it would be a breach of financial services legislation.
The exclusion of the main discretions listed above seems reasonable for credit servicers as they are not the core activities of credit servicing firms. However it is surprising that the principal areas of discretion in relation to management of loans are excluded from regulation and that the only regulation of them is an attempt to indirectly regulate these activities by making the exclusions conditional on them being carried out in a manner that is in accordance with financial services legislation, including the Central Bank statutory codes of conduct. This concept, while an attempt to give consumers some kind of recourse against the holder of a loan book, does not seem much of an improvement on the current position where purchasers of loan books are encouraged to comply with those codes as it is unclear how the Central Bank would impose sanctions on a purchaser of a loan book that it does not regulate.
However, it does mean that unregulated title holders to loans will have to comply with the same codes as regulated title holders to loans, if they are to be compliant
The Bill shows that Ireland Inc. has not learned a key lesson from the UK
In the United Kingdom, the activity of administering mortgage contracts is subject to regulation pursuant to the Financial Services and Markets Act 2001 (Regulated Activities Order 2001). Recognising the regulatory gap that occurs when mortgages are sold on, HM Treasury tried to grapple with the issues being considered now by the Department of Finance in HM Treasury’s Mortgage Regulation Consultation of December 2009 when it considered regulating the management of regulated mortgage contracts. HM Treasury suggested that “managing” a regulated mortgage contract was having the power to exercise or to control the exercise of any of the rights of a lender under a regulated mortgage contract. The language ‘exercise or to control the exercise of any of the rights’ from that consultation is imprecise but it seems reasonable to consider that it involves making decisions in relation to the rights of the lender rather than simply implementing them, which are the same concepts that are excluded from being credit servicing in the Bill.
HM Treasury's consultation noted that allowing the loan holders to remain unregulated may cause "severe harm to borrowers". In its summary of responses to that paper, HM Treasury noted that it was committed to addressing the potential disadvantages for borrowers by the absence of regulation of loan holders but did not propose amendments, instead acknowledging there is a weakness in the (UK) regulation, namely that regulation of the credit servicing firm alone may not be sufficient protection for consumers.
In deciding to regulate loan servicers but not loan purchasers, it could be said that the Bill does not address the regulatory gap discussed in the Consultation Paper.
Type of credit covered by the Bill
The Bill refers to a 'credit agreement' as an agreement whereby a person grants, or promises to grant, credit to a relevant borrower. Credit is defined by reference to the Central Bank Act 1997 (the 1997 Act) where 'credit' means a cash loan (whether or not provided on the security of a mortgage or charge over an estate or interest in land), but does not include judgements, pawnbroker credit, credit from utilities, credit without interest, overdraft facilities, and credit from an employer at reduced interest rates.
No distinction is made between credit types under the Bill so long as the credit agreement is with a ‘relevant borrower', defined as:
- a relevant person; or
- a micro, small or medium-sized enterprise within the meaning of Article 2 of the Annex to the Commission Recommendation 2003/361/EC of 6 May 2003.
A relevant person is defined in the 1997 Act as a natural person who is neither a professional client for the purposes of the Markets in Financial Instruments Directive (MiFID) nor a regulated financial services provider.
This means that the Bill also extends to SME loan books. The Commission Recommendation defines SMEs as enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.
The proposed application of the credit servicing regime to SMEs triggers a requirement for SME lenders to become authorised as credit servicing firms where the lender also services the loans. The definition of 'credit servicing firm' states that the holder of a loan issued to a natural person or SME is deemed to be a credit servicing firm itself where credit servicing is not being undertaken by a credit servicing firm or an regulated financial services provider authorised to provide credit in Ireland. The proposed application of the Bill to SMEs comes as surprise as it was not flagged in the Consultation Paper.
Amended definition of "retail credit firm"
Section 29 of the 1997 Act provides that a person is prohibited from, amongst other things, acting as a “retail credit firm” without authorisation. A retail credit firm includes any “person who holds itself out as carrying on a business of, and whose business consists wholly or partly of, providing credit directly to relevant persons”.
The definition of “retail credit firm” is subject to a number of exclusions. In particular, the definition currently excludes persons who are “regulated financial service providers”. The definition of a regulated financial service provider is taken from the Central Bank Act 1942 and includes “a financial service provider whose business is subject to regulation by an authority that performs functions in an EEA country that are comparable to the functions performed by the Bank under this Act or under a designated enactment or designated statutory instrument”. A financial service provider is defined as a person who carries on a business of providing one or more financial services. This means that entities authorised by regulators in other EEA jurisdictions can currently provide credit to consumers in Ireland, even if their home authorisation does not include providing credit. The new drafting would appear to mean that this exemption is being narrowed so that only an entity that is regulated by the Central Bank or another EEA regulator to provide credit in Ireland (i.e. licensed Irish banks or EU passported banks) may do so.
Financial Services Ombudsman
Section 6 of the Bill brings complaints against credit servicing firms under the ambit of the Financial Services Ombudsman (FSO) by expanding the definition of "eligible consumers" entitled to make a complaint to the FSO. Where the owner of the loans is unregulated, the credit servicing firm will be the regulated entity subject to complaints to the FSO. The loan holder will be subject to FSO complaints where no credit servicing firm is appointed.
Authorisation and Transitional Period
Under the proposed amended Section 29 of the 1997 Act it would be a criminal offence to act as a retail credit firm or credit servicing firm without authorisation.
Section 4 of the Bill sets out transitional arrangements for retail credit firms and for credit servicing firms. Very similar conditions are applied to both. An entity carrying on the business of a credit servicing firm or of a retail credit firm before the commencement of the legislation is taken to be authorised to carry on such business until the Central Bank has granted or refused authorisation, provided that an application for authorisation is lodged within three months of commencement of the legislation. For the period between application and authorisation the Central Bank may impose conditions or requirements on the applicant and/or direct that the applicant not carry on credit servicing.
It should be noted that the Bill is in draft form as it still has a number of phases of the legislative process to go through before being enacted and as such may be substantially amended before enactment.
The Bill is available here.