Address by Director of Consumer Protection, Bernard Sheridan, to IBF/Certus

‘Best Practice in Mortgage Arrears Management’

I would like to thank the IBF for inviting me to speak this morning on the management of mortgage arrears. It is very timely as it coincides with the publication of the Central Bank’s revised code on mortgage arrears, the CCMA. The CCMA was introduced by the Central Bank as part of its wider response to the growing problem of mortgage arrears and provides for a strong framework to protect borrowers facing or in mortgage arrears. You could ask why have we carried out this review at this time (which has included a public consultation). There are a number of important reasons why such a review was appropriate. The twin objectives for the review were to ensure that the CCMA continued to provide a strong framework to protect borrowers in mortgage arrears and also to ensure it is enabling the delivery of long term, affordable and sustainable solutions between the lender and the borrower.

The CCMA has been subject to ongoing review to reflect the changing and difficult context and the new CCMA has been introduced to reflect three particular important challenges:

• The growing level of arrears and the protections needed to reflect long term as well as early arrears situations of borrowers;
• The need to ensure that borrowers are offered long term restructuring arrangements where necessary and appropriate, and for lenders to deliver solutions for borrowers consistent with the targets already set by the Central Bank for the main banks, and to move on from short-term arrangements or where no arrangement has yet been made with the borrower; and
• The need to ensure that borrowers are equipped with the necessary, clear and timely information so as to be informed throughout the process and are aware of the importance of seeking independent advice as and when necessary, and options available to them.

I know some people may be concerned about a number of the changes we are introducing and what impact they may have on borrowers. The changes have been made to the new CCMA only where borrowers interests remain protected and where the changes will help the delivery of resolutions to the thousands of borrowers who are relying on lenders to provide solutions. The new CCMA reflects the outcome not only of the public consultation process but also our ongoing monitoring of lenders’ practices as well as research and inspections of firms.

The issue of mortgage arrears has continued to grow to levels which we all hoped we would not see. At the end of March this year there were 95,554 private residential mortgage accounts for principal dwelling houses (PDH) in arrears of over 90 days. Not only has the level of overall arrears grown, but the extent of long term arrears is now very significant. There were 54,135 PDH accounts or 7% of accounts with arrears greater than 1 year, with just under half of those (or 25,940) with arrears of greater than 2 years. We therefore need to make sure that the CCMA continues to provide the protections necessary for all borrowers, those in long-term as well as those in early arrears.

The mortgage arrears data also shows the extent to which lenders and borrowers have agreed restructuring arrangements and the extent to which long-term sustainable solutions have been put in place. While it is clear that lenders have put in place forbearance arrangements for many borrowers, the level of long-term restructures remains very low. The Central Bank is expecting a sharp increase in the number of sustainable solutions being offered in the coming weeks and months, consistent with the targets we have set. We have set targets for the main banks to deliver such restructures, which are necessary to return borrowers to a sustainable situation. We need to make sure that the CCMA is supporting and facilitating the resolution of each case, while ensuring that the key protections remain in place for borrowers. This is ultimately what the CCMA is about - protecting borrowers while a resolution is worked out.

The third objective for reviewing the CCMA now was to ensure that the level of transparency for borrowers is right, particularly with the introduction of the new personal insolvency legislation, as lenders move to deliver longer term solutions.

This morning I would like to cover two broad areas in the context of arrears management, with particular reference to the new requirements introduced in the revised CCMA:

1. Managing the relationship between the lender and the borrower
2. Enabling the delivery of the arrears resolution process.

Managing the Relationship

Having an effective relationship with the borrower will be dependent on a number of critical factors including early engagement, a positive and constructive on-going dialogue and a level of contact which is appropriate and avoids harassment, but supports the resolution process. Understanding a borrower’s changed circumstances at the earliest possible point is critical. The new CCMA not only requires lenders to proactively encourage borrowers to engage with them, but now they must also communicate with all borrowers on at least an annual basis to encourage early contact by borrowers facing arrears. The new CCMA also requires lenders to communicate promptly and clearly with the borrower as soon as the borrower enters arrears.

The nature of the engagement is subject to important CCMA rules. The language used in communications must indicate a willingness to work with the borrower to seek resolution, and all information must be presented in a clear, understandable and consumer friendly manner.

The new CCMA requires that each lender must have a communications policy approved at board level which ensures that the CCMA is being complied with. The level of contact with a borrower must be proportionate and not excessive. We have carefully examined the limit on successful unsolicited contacts of three per month contained in the current CCMA. For borrowers who are cooperating with their lender, this restriction is not relevant as there is an on-going two-way engagement, and in most of these cases, future engagement is agreed with the borrower. For those borrowers not cooperating and not engaging, it is difficult to see how a solution can be agreed in the absence of any engagement.

The Central Bank requires lenders to make every reasonable effort to agree an arrangement and we believe the limit of three successful contacts may prevent lenders in these cases from establishing and maintaining the necessary contact in order to resolve the case. Clearly, we do not want lenders to harass people and there are new requirements on lenders to ensure that communications are not aggressive, intimidating or harassing and that unnecessarily frequent communication is not made. Unsolicited calls should only be made where necessary. We have reviewed the handling of calls by a number of lenders and in the vast majority of cases borrowers agree to future contact once initial contact is made. It is for that reason that the new CCMA does not include the monthly limit of three unsolicited contacts. We will continue to monitor this area closely to ensure that lenders are not making unnecessary contacts. As I will discuss in more detail later, we will be closely monitoring the implementation of the CCMA over the next 6 months and enforcing compliance with its provisions will be a key priority for the Central Bank in 2014.

This leads me on to the changes being made to the definition of a borrower who is not co-operating. It is not in a borrower’s or a lender’s interests to be in a situation where a working relationship has not been established. The result of no engagement and non co-operation is that the borrower cannot influence the outcome of the process, may be subject to penalty charges and subsequently legal proceedings for repossession may commence immediately. Also there would be no certainty they could avail of the new arrangements under the insolvency legislation. The non-cooperating borrower is in a very perilous situation with growing arrears and fewer protections. Therefore new protections have been added to the CCMA to ensure that lenders must give written notice to the borrower of the potential to be treated as not co-operating and the consequences of being treated as such. For the lender dealing with someone who is not cooperating, it means that their options are limited and the costly legal process is a likely outcome.

The current CCMA provides that a lender may classify a borrower as not co-operating if they fail to provide information sought by the lender and if the borrower has, during a 3 month period, failed to meet mortgage repayments in full and has not made contact with or responded to any communications from the lender. The new CCMA provides that the lender may now specify the timeline for the return of information; this will provide greater clarity to the borrower of what is expected from them. The new CCMA is also now clarifying that the engagement must be in such a way to enable the lender to complete an assessment of the borrower’s circumstances. Clearly, this needs to happen for progress to be made. In order to protect borrowers who are genuinely trying to engage, the new CCMA requires lenders to inform borrowers (with at least 20 business days’ notice) of the specific actions they need to take to avoid being classified as not co-operating. In addition, the borrower must be informed in writing if they have been subsequently deemed to be not co-operating. This information must include what options are available to them, their right to appeal the decision and their right to consult a Personal Insolvency Practitioner under the insolvency legislation. We believe these changes will bring greater certainty and transparency for both the borrower and lender, while protecting those who are genuinely trying to cooperate.

The final point I would like to make on the relationship issue is the need for lenders to ensure that borrowers are fully informed all the way through the mortgage arrears resolution process. A key element of this is the MARP booklet which must be provided to borrowers.

The new CCMA expands on the information which must be provided in the MARP booklet including:

• An explanation of how the alternative repayment arrangements work and their key features;
• An explanation of other possible options (voluntary surrender, trading down etc.);
• An explanation of the meaning of not co-operating and the implications of such; and
• A summary of the lenders communications policy.

The new CCMA seeks to ensure that borrowers are aware of the importance of obtaining independent advice and information not only at the start of the process but during the ongoing engagement process. Key links are made to information on keepingyourhome.ie as well as on the MABS website. In this regard a panel of accountants has been established to provide borrowers who have been offered a long term forbearance option by the lenders participating in the scheme, information in relation to that option and an explanation of the implications of that option, which service is paid for by the lenders. This service is limited to providing information on the option rather than advice on the alternatives.

Also for insolvent borrowers the new CCMA requires lenders to provide information on the new insolvency service, particularly when no alternative repayment arrangement can be agreed. This should help ensure borrowers are aware of their rights and where another possible avenue may be available to them.

Enabling the delivery of the arrears resolution process

The CCMA is not only about providing key protections but also ensuring that the framework facilitating the protections is enabling the delivery of solutions by lenders for each arrears case. The CCMA requires lenders to make every reasonable effort to agree an alternative repayment arrangement and must explore all of the options. These considerations must be documented by the lenders. I have already spoken about the need for engagement and co-operation. Building on that, the delivery of a resolution must be based on the circumstances of the borrower, which should be reflected in the Standard Financial Statement (SFS). The new CCMA now requires lenders to provide the borrower with the SFS at the earliest appropriate opportunity, and they must offer to assist the borrower with completing the document. Where there is a timeline for the return of information the new CCMA now provides that the timeline must be fair and reasonable and must reflect the type of information requested and whether the borrower may need assistance in gathering the information. Lenders must also play their part in progressing the assessment as quickly as possible and the new CCMA requires the assessment to be done in a timely manner.

The new CCMA also enables a borrower to agree with their lender to put a temporary arrangement in place prior to completing a full SFS where a delay would exacerbate the borrower’s situation.

Where the lender offers an alternative repayment arrangement which is accepted by the borrower, it is important that it is regularly reviewed to ensure it is working. However, to reflect the expected shift towards longer term solutions we have changed the requirement for a six-monthly review to intervals which are appropriate to the type and duration of the arrangement. This will give borrowers greater certainty for longer, regarding future repayments, particularly where a long-term solution has been agreed.

Where an alternative repayment arrangement has not been agreed or where the lender considers the case to be unsustainable, the potential options available to the borrower are limited to possible loss of the home (through, for example, voluntary sale or voluntary surrender) or availing of an arrangement under the insolvency legislation. We believe it is important that borrowers are given sufficient time to consider their situation and the new CCMA provides for a three-month period at the conclusion of the process to allow borrowers consider their next steps. On the basis that this new provision is providing the breathing space at the end of the process necessary for borrowers, the rationale for retaining the previous moratorium falls away. The previous moratorium included any time taken by lenders to start to deal with the borrower, to assess the case and offer a solution where appropriate, and to agree a solution with the borrower, resulting in a lack of clarity for the borrower regarding how much of the 12 month moratorium remained. The new CCMA requires lenders to follow the MARP and make every reasonable effort to agree an alternative repayment arrangement with a borrower. Provided that borrowers are co-operating, they must be given at least eight months from the date the arrears arise before a lender can commence legal proceedings. The CCMA also did not provide for a definite period of time for the borrower to consider their options at the end of the process. This is particularly important now that insolvent borrowers will have the option of seeking to avail of one of the new arrangements under the insolvency legislation. The new CCMA provides that lenders must inform the borrower of their right to consult a Personal Insolvency Practitioner and the availability of information from the Insolvency Service of Ireland. This helps ensure that the borrower is aware of the full range of options open to them particularly where they have been co-operating but are in an unsustainable situation.

In relation to resolution it is important to stress that the current CCMA requires lenders to have considered all possible sustainable solutions before taking the ultimate step of commencing legal proceedings. There are clear requirements in the CCMA which enforce this. In this context we considered whether there are any circumstances which would merit a lender offering a borrower a sustainable solution which resulted in the borrower changing from their existing tracker rate. This issue in particular has evoked significant reaction, understandably, where people who are already struggling to keep up repayments and are in arrears could face a worse situation where the interest rate could be increased by the lender above the existing tracker rate. We are very aware of this concern and the amendment to the CCMA is aimed at those who are in a situation where no arrangement is being offered and they have no alternatives except voluntary surrender or repossession or seeking to use one of the arrangements under insolvency legislation. Let me be clear that it is our intention that this new provision is designed for those exceptional cases and in a last resort scenario. For the vast majority of borrowers in arrears who are on a tracker rate lenders are able to deliver sustainable solutions without affecting the interest rate on the loan. The new CCMA is very clear that any such arrangement must be part of a sustainable solution and is affordable for the borrower and importantly can only be offered where no existing option which retains the tracker rate is sustainable. We will be closely monitoring lenders in particular on this issue to ensure they comply with the new CCMA.

My final point in relation to resolution is the importance of having an effective right of appeal. The CCMA contains provisions in relation to the internal Appeals Board which must consider appeals from borrowers who are not satisfied with the offer made by the lender. At the end of 2012 we reviewed the operations of the appeals boards of a number of lenders and found they were complying with the CCMA. It is true to say that the Appeals Board is not independent from the lender and a number of people had proposed during the consultation that we should require this. Our powers under the CCMA do not extend to requiring lenders to delegate to independent parties commercial decisions in relation to forbearance or debt restructuring. Nevertheless I believe the Appeals Board plays an important part in the process as it allows a second review of individual cases. The new CCMA now requires the Appeals Board to consider appeals where a borrower has been classified as not co-operating. It also requires lenders to maintain logs of all appeals and to monitor them to identify particular trends. The right of borrowers to refer their complaints to the Financial Services Ombudsman remains and covers not only how an appeal is treated but also more broadly how a borrower has been dealt with by the lender.

In the context of the data we published last Friday on mortgage arrears we are all aware that the resolution of mortgage arrears for borrowers and lenders remains one of the biggest challenges we all face. It is important that borrowers who are struggling to cope and who are cooperating are dealt with in a fair and transparent manner. It is also important that lenders deliver sustainable solutions in a way that demonstrates that they are genuinely working in the best interests of their customers. Certainly the CCMA has and will continue to provide a strong framework to protect borrowers but I believe the new CCMA will also support the key objective of enabling the delivery of solutions for borrowers. This will be largely dependent on lenders implementing the new requirements in a way that is consistent with these twin objectives.

In that context I wanted to end with a clear message for lenders. As I said earlier you are facing a major challenge in resolving the arrears cases for your customers. The CCMA provides the broad framework for how you should go about doing this. You have a clear responsibility to your customers to work with them and to resolve each arrears case in a fair and transparent manner. Our role in the Central Bank is to regulate the lenders to ensure that is what they are doing. We will over the next six months be monitoring how you are rolling out the new CCMA and after that period monitoring compliance with its requirements will remain a high priority for the Central Bank. We expect and require all lenders to work in their customers’ interests recognising that those customers facing or in mortgage arrears are in a particularly difficult situation and that they are relying on you to work tirelessly with them during this difficult period.