Address by Bernard Sheridan, Director of Consumer Protection, to the MABS Seminar on Mortgage Debt

Regulation of Lending Practices

Good morning everyone and I would like to thank John Culbert, Chairman of MABS Waterford for inviting me along this morning to speak to you. I welcome the publication of the research “Lifting the Load” which presents a very thorough overview of the current mortgage arrears difficulties facing borrowers and also clearly sets possible additional measures which could be taken to help those in difficulties. I must say I found the way the experiences and reflections of borrowers are presented in the research to be particularly enlightening as it really brings out the real impact financial difficulties have on people. The research should not only inform policy makers but also help strengthen their resolve to act. The Central Bank of Ireland plays an important role in not only regulating the providers of credit but also in ensuring that all lenders treat their customers fairly throughout the term of the relationship. The Central Bank also has a key role in establishing the framework within which the provision of credit operates through putting in place statutory codes of conduct which set out the rules under which lenders must operate and how they should behave when borrowers run into difficulties. This morning I intend to focus on three topics,

• The Code of Conduct on Mortgage Arrears – what does it achieve?
• Central Bank proposals for strengthening the protections for consumers in respect of new lending.
• Responding to some of the issues raised in the research.

Consumer Strategy/Working with MABS

The Central Bank is currently developing its consumer protection strategy for the next three years. We are engaging with external consumer and industry groups to help us identify what the key consumer risks are and what areas we should be focusing our resources on. Getting it right for consumers is at the centre of what we do and clearly mortgage arrears as well as other forms of arrears will continue to be a priority for us for the foreseeable future. MABS is one of those key groups with whom we are engaging and we have already received constructive and challenging views from it. Earlier this year we established the Consumer Advisory Group to advise us on key consumer issues and policy proposals. I am glad to say that Michael Culloty from MABS NDL is a member of that group in his personal capacity and we appreciate the insights he offers on a range of issues. We have also worked with MABS earlier this year in order to get agreement on the Standard Financial Statement, which is a key component of the Mortgage Arrears Resolution Process. We believe that this was an important achievement as it will help to ensure some level of consistency regarding how lenders treat borrowers in arrears. We have also worked with MABS in producing a consumer guide to completing the SFS which was published last week and we look forward to continuing this constructive relationship with MABS.

Mortgage arrears data

At the end of June 2011 there were 777,321 private residential mortgage accounts held in the Republic of Ireland to a value of €115 billion. Of these, 55,763 accounts, or 7.2%, were in arrears for more than 90 days. This compares with 49,609 accounts (6.3% of total) that were in arrears for more than 90 days at the end of March 2011.

The figures also show there were 69,837 residential mortgage accounts that were categorised as restructured at the end of June 2011. This compares to 62,936 restructured accounts at the end of March 2011. Of this total 39,395 are not in arrears and are performing as per the restructured arrangement. The balance of restructured accounts (30,442) has arrears of varying categories (arrears both less than and greater than 90 days). Therefore, 95,158 accounts are either in arrears greater than 90 days or have been restructured and are not in arrears as at the end of June 2011.

173 properties were taken into possession by lenders during the quarter, of which 54 were repossessed on foot of Court Orders and 119 following voluntary surrender or abandonment. These 173 repossessions compare with 140 repossessions that took place in the quarter ended March 2011. There have been a total of 886 repossessions since this quarterly report commenced in September 2009.

It is clearly evident from these figures that many families are really struggling to cope with changed circumstances. The trend in the number of accounts in arrears is rising while the number of repossessions remains relatively low when compared to other jurisdictions. One positive aspect from the figures is that almost 70,000 account holders have reached agreement with their lenders on restructuring which allows the consumer time to try to address the arrears. The challenge though is in the longer term how many of these borrowers can work their way out of the arrears and for those who cannot what is the appropriate way of helping them.

Code of Conduct on Mortgage Arrears (CCMA) – What does it achieve?

It provides a statutory framework for how customers in arrears must be treated.

The CCMA was first introduced in February 2009 as a statutory code and built on the provisions of the Irish Banking Federation voluntary Code of Practice on Mortgage Arrears. The CCMA was revised towards the end of 2010 to address the recommendations of the Government review group and the revised CCMA came into effect on 1 January 2011. While this was a very challenging timeframe for lenders to meet we believed that it was very important that borrowers could benefit from the additional protections as early as possible. Lenders are obliged to comply with the requirements and breaches of the CCMA may lead to enforcement action being taken by the Central Bank against a lender.

It covers all mortgage lenders in the market

The provisions of the CCMA apply to all mortgage lenders and not only banks. This means the standards which small lenders must meet are the very same as those for the large retail banks.

The CCMA changes the way lenders must treat their customers who are in arrears

There are two key underlying principles set out in the CCMA which changes the way customers must be treated.

• “Each case of mortgage arrears is unique and needs to be considered on its own merits”
• “All such cases must be handled sympathetically and positively by the lender with the objective at all times of assisting the borrower to meet his/her obligation”.

This means that each case must be examined and considered on its own merits taking the customers individual circumstances into account. The lender must also strive to achieve a positive outcome for the borrower by assisting them to meet their obligations.

(It establishes a clear process for how cases must be considered (the Mortgage Arrears and Resolution Process)

There are five stages in the MARP which must be followed by all lenders:

• Stage 1: How your lender must communicate with you
  A lender must ensure that all communications about arrears and pre-arrears are provided to the borrower in a timely manner. All information relating to a lender’s handling of arrears and pre-arrears cases must be presented to the borrower in a clear and consumer friendly manner. The language used in communications must indicate a willingness to work with the borrower to address the situation and must be in plain English so that it is easily understood. Legal jargon must be avoided, where possible.
  
  If your mortgage account goes into arrears and the arrears remain outstanding for 31 days, your lender must write to you and inform you of the status of your account within 3 business days. This information must include a booklet on the MARP process.
• Stage 2: Financial Information
  Your lender will ask you to complete a form called a Standard Financial Statement. In this form you will have to provide information on your current income, expenditure, and other amounts you owe and any assets you own.
• Stage 3: Assessment
  All mortgage lenders must have a dedicated Arrears Support Unit (ASU), which must be adequately staffed. Your completed Standard Financial Statement and other factors relating to your case will be assessed by the ASU which will decide whether or not to offer you an alternative repayment arrangement and what type of alternative repayment arrangement is appropriate to your circumstances.
• Stage 4: Resolution
  Your mortgage lender must consider all the options available for an alternative repayment arrangement for example, an interest-only arrangement for a period of time, extending the term of the mortgage or capitalising the arrears and interest so that they are collected over the balance of the mortgage term. While they must consider whether such arrangements are viable, they are not obliged to offer you such an arrangement. If a lender is not willing to offer a borrower an alternative repayment arrangement, the reasons must be given in writing to the borrower.
• Stage 5: Appeals
  All lenders must have an internal Appeals Board in place. You can take an appeal on any of the following grounds:
  
  a) Your lenders’ decision on your case; and/or
  
  b) How your lender treated you under the MARP process; and/or
  
  c) Whether you feel your lender has not complied with any of the requirements under the CCMA.

It prohibits lenders from harassing borrowers who are in arrears

Despite concerns raised by various lenders we decided to introduce a limit on the number of unsolicited contacts to three per month. While this allows a lender to make a reasonable effort to make contact with their customers we believed that putting borrowers under more stress by continually making unsolicited contact is not helpful and goes against the new approach as set out in the general principles mentioned above.

The CCMA provides a framework which allows more time for solutions to be found

For borrowers who are co-operating with their lenders the CCMA prevents lenders from commencing legal action to repossess the home. This period is 12 months from the date the arrears first arose but importantly does not include any time that the borrower is co-operating or any period when they are appealing a decision by the lender.

It contains some other key protections which help borrowers in difficulties

The CCMA prevents lenders from moving people off tracker mortgages and forcing them on to a higher interest rate simply because the borrower is in arrears. Tracker rates have remained relatively low over the last few years and borrowers have benefitted significantly from this where they have been fortunate enough to have taken out a tracker mortgage.

It also prohibits lenders from adding on charges to borrowers. These lenders had previously been approved to impose arrears charges to allow them recoup the cost of managing arrears. However due to the scale of the difficulties facing borrowers we believed that it was no longer appropriate for such charges to be made.

Lenders are also now required to make information about MABS available to their customers.

However the CCMA recognises that some mortgages may not be sustainable in the longer term. The MABS report sets out very clearly the three broad groups who are affected by arrears i.e. short-term, medium-term and not sustainable in the long-term. The current options are designed to assist the short-term group primarily but it is important that sufficient time is given for those in the second category. There has been such a sudden and significant increase in unemployment in a short period that it is going to take some time for the economy to recover. However many of the people in the medium-term difficulties will recover if given time. It is in respect of this third category where further solutions are needed especially as many of them are in negative equity. The reform of the bankruptcy legislation and the implementation of the Law Reform Commission recommendations need to be delivered for this group so that they can have hope for the future after they lose ownership of their homes.

Central Bank proposals for strengthening the protections for consumers in respect of new lending

Consumer Protection Code (Code)

When the Code came into full effect in the middle of 2007 it was the first time that the concept of suitability was applied to provision of credit. Prior to that, suitability was associated primarily with investment decisions rather than where a customer was availing of credit from a lender. Certainly it would have been better if the Code had been in force a number of years earlier to give it time to become effective prior to the economic crisis. Also the Code was based largely on principles backed up by rules. This allowed each lender to determine how it would assess suitability and within that affordability.

We have found that where specific rules were introduced which were clear and unambiguous this approach was more effective. For example the Code banned the offering of unsolicited pre-approved credit facilities and also prohibited an increase in a consumer’s credit card limit unless requested by the consumer. At that time these were practices that were coming into the market which encouraged consumers to become over-indebted. Consolidation of a number of short term loans into a mortgage was also a concern at the time. The Code requires lenders to give a written comparison of the total cost of the alternatives to the consumer before the consumer commits to the new loan.

Proposals to enhance the Code

We have now completed our review of the Code following two rounds of consultation. We will be introducing a number of additional measures to protect borrowers in addition to the existing rules which fall into three areas i.e. provision of information at the time of taking out the mortgage or loan, affordability assessments and dealing with arrears. These measures will come into effect next year.

Provision of information

• Prior to providing credit a lender must explain to the consumer the effect of missing any of the scheduled repayments.
• If the application for credit is turned down, the reasons for the refusal must be clearly outlined.
• Any charges on fixed rate loans relating to early repayments must be explained in a worked example in monetary terms.
• Lenders must have a dedicated section on their websites which includes information to encourage consumers to deal with arrears, relevant contact details if concerned about arrears and a link to the MABS website.

Mortgage suitability

We are proposing additional provisions aimed at promoting a greater level of responsible lending which focus on assessing the consumer’s ability to repay borrowings including:

• Before offering, arranging or recommending credit, a regulated entity must fully assess the consumer’s ability to service the repayments over the duration of the agreement.
• A regulated entity must, when assessing the consumer’s ability to repay a mortgage, calculate the impact on the repayment amount of a 2% interest rate increase above the interest rate offered to the consumer. Where the consumer is availing of an introductory interest rate, the calculation must be based on the lender’s standard variable rate or the rate to be applied after the introductory period.
• Regulated entities are prohibited from accepting a self-certified declaration of income from a consumer as evidence of his/her ability to repay a mortgage.
• In the case of interest-only mortgages, a regulated entity must be satisfied that the consumer will be able to repay the principal at the end of the mortgage term.
• Where a mortgage is interest-only for a limited duration, a regulated entity must be satisfied that the consumer will be able to meet the increased mortgage repayments at the end of the interest-only period.
• A further affordability assessment must be carried out prior to advancing any additional credit.

Arrears handling – personal debt other than CCMA mortgages

The revised Code will also include more specific requirements in relation to how borrowers who fall into arrears on loans other than mortgages must be treated. Just like the CCMA we are proposing that lenders must endeavour to agree an approach which will assist the consumer in resolving the problem.

The steps will include the following obligations –

• Where an account is in arrears for 31 calendar days lenders must contact the consumer and provide information on the status of the account along with relevant contact details for MABS.
• If relevant, a regulated entity must remind the consumer that he/she purchased payment protection insurance from the regulated entity, and provide a copy of the policy.
• Unsolicited contacts concerning the arrears situation are limited to three communications per month.
• Rejections by the regulated entity of revised payment amounts or schedules must be documented with accompanying reasons and communicated to the consumer.
• Regulated entities will be required to remind borrowers in arrears of the implications on other accounts held with the lender including the possibility of offsetting.

The provisions of the Code must also be complied with by any entity to which a regulated entity outsources its debt management functions.

Response to issues raised in research

I would like to respond to some of the recommendations set out in the report particularly those which are directly relevant for the Central Bank.

Voluntary Surrender Code

Recommendation 8 states that the Central Bank should develop a code of conduct concerning voluntary surrender.

The CCMA currently does not contain specific rules in relation to how lenders should treat borrowers who are seeking to hand back the keys. We have committed to reviewing the CCMA 18 months after its introduction. Prior to this review we intend to carry out an examination of the level of compliance by lenders with the CCMA and also to feed any findings from this examination into an updated CCMA. As part of that review of the CCMA we can commit to including requirements in relation to the voluntary surrender process. Therefore it is likely that in 2012 we can address this recommendation.

Trading down

Recommendation 6 states that lenders should facilitate trading down by borrowers who are in negative equity.

I believe that this can be a suitable option for some borrowers. We have told lenders that they need to engage with us prior to offering mortgages to customers which also includes any negative equity element from the previous mortgage. We do not want to see lenders offering these loans in an imprudent manner or to customers who cannot afford the associated repayments. However if the overall debt has been reduced resulting in lower repayments this should be a positive outcome for some borrowers. Currently two lenders are offering such a service on a limited basis and we are open to considering proposals from other lenders.

Responsible Lending

Recommendation 9 refers to the Code and suggests that it should be amended to include specific reference to responsible lending practices. I have set out above the proposed changes to the Code which will become effective in early 2012.

Regulation of debt management companies/mortgage intermediaries

We are working with the Department of Finance on developing an appropriate regulatory framework for these firms. In my view there are two main issues to be addressed i.e. responsibility for any funds held by these firms on behalf of their customers’ needs to be clear and also the level of fees and charges which can be imposed should be set out in law. In respect of mortgage intermediaries these firms are subject to the same standards as all other lenders. We would be interested in seeing the specific cases referred to in the report to determine if we need to take regulatory action against those firms.

In conclusion the Central Bank will continue to prioritise the issue of mortgage arrears as part of its consumer protection role. We will continue to take whatever measures we can to assist borrowers in distress. I would like to commend MABS Waterford on the research that they have conducted and I look forward to continuing our strong relationship with MABS.