Submission by Michael McGrath TD on behalf of Fianna Fil:

Public Consultation: Consumer Protection on the Sale of Loan Books

Executive summary:
The ownership of credit should be a regulated activity and those that purchase
all or part of a mortgage book from a regulated entity should be required to
receive authorisation from the Central Bank.
Third parties who purchase mortgages should, by virtue of the Central Bank
authorisation process become subject to the Code of Conduct on Mortgage
Arrears (CCMA) and customers should be eligible to take cases to the Financial
Services Ombudsman.
Given the scale of mortgage sales to date and the potential for more sales, the
issue should be dealt with as soon as possible. Further delay may result in
unnecessary distress to mortgage holders.
Where a purchaser contracts an agent to administer mortgages on its behalf the
agent should be required to ensure that it has adequately trained staff to deal
with mortgage arrears cases and related issues. The agent should publish its
customer care policies and ensure it offers support and assistance to those in
difficulty to the same standard as mortgage originators are required to provide.
For any existing customers who have lost the protection of the CCMA by virtue
of their loan being sold and where they believe that the purchasing entity has not
abided by the CCMA, the legislation should reflect the need to ensure that they
too have a mechanism to enforce their consumer rights.
The Central Bank should examine how to protect consumers whose loans are
sold in respect of areas not specifically covered by the CCMA. In particular it
should examine how to protect borrowers from unjustified increases in standard
variable rates and excessive surcharge interest if they fall in to arrears.
The Minister for Finance should commit to update the Relationship Framework
between his Department and the State supported banks such that his permission
is required for the sale of any residential mortgages to third parties.

Sale of mortgages to unregulated third parties
Under the terms of the Central Bank Act 1989, Codes of Practice issued by the
Central Bank are only binding on persons or entities supervised by the Central Bank.
This means that if a mortgage book held by a regulated entity is sold to persons or
entities not subject to the supervision of the Central Bank the borrowers lose the
protection of Codes of Practice issued by the Central Bank including for example the
Code of Conduct on Mortgage Arrears.
IBRC was established, operated and subsequently wound up in order to protect the
financial interest of the State and all of its citizens. It was therefore manifestly unjust
that borrowers should lose the protection of Codes of Practice issued by the Central
Bank as a result of a process undertaken in their name and for their benefit.
The issue has also arisen in relation to the sale of mortgage books held by foreign
owned banks which have wound down their operations in Ireland. In 2012, GE
Money sold its residential portfolio of approximately 3,500 mortgages to the
Australian company Pepper Finance Corporation (Ireland). In December 2013,
Lloyds Banking Group sold its Irish residential portfolio of 2,000 mortgages to Apollo
Global Management.
Potential for further sales of loan books
As well as upwards of 15,000 mortgages already sold to third parties there are a
number of overseas lenders who are in the process of winding down their operations
in Ireland. This could result in further substantial loan sales.
There is also an issue of concern in relation to the State supported banks. Under
Clause 11 of the relationship framework with AIB, the bank is not obliged to consult
with the Minister for Finance if they propose a disposal of a tranche of loans for an
amount less than 100 million. A 50m limit would apply in the case of Permanent
TSB making a similar disposal.
Advocacy groups have warned of a situation in which either institution could dispose
of loans which are in arrears for significant periods of time, essentially absolving the
bank of the responsibility for dealing with the most difficult of cases without
Ministerial approval.
Fianna Fil believes the relationship framework should be amended to prevent the
sale of residential mortgages by State supported banks. In the meantime the State
must ensure these borrowers continue to receive the protections they currently
enjoy. Only a legislative change can achieve this.
Protection offered by the Code of Conduct on Mortgage Arrears.
When the economic crash occurred thousands of families had trouble keeping up
their repayments. In itself a mortgage contract offers little by way of protection to
such borrowers. To assist those that fell into arrears it was necessary to put in place
a code of conduct which would set out clearly how a distressed borrower should be
treated by their financial institution.
While the code has been diluted somewhat it still offers a number of vital protections.
These include ensuring that the lender has appropriately trained staff and clear
procedures for dealing with customers in arrears. It also places restrictions on the
lender imposing surcharge interest unless the borrower is not co-operating and
includes a stay on the initiation of an action for repossession for up to 8 months.
Problem with voluntary compliance
The Government had promised to legislate in 2015 to deal with the sale of
mortgages to unregulated entities. Fianna Fil believes this is far too late and action
is required before the end of the new Dil term commencing in September.
The Government have sought to emphasise that prior to legislation being fully
enacted that the purchasers of IBRC mortgages and other loan books which have
come to the market have committed to voluntarily complying with the CCMA.
Voluntary compliance with the CCMA is inadequate, it does not address the issue of
who would enforce the code in the event of a dispute arising. On the eve of an
appearance before the Joint Oireachtas Finance Committee, the IBRC Special
Liquidator KPMG announced that the bidders for the IBRC mortgage book had
agreed to voluntarily comply with the CCMA. However, it quickly emerged during the
committee hearing that this was of little real value. The commitment to 'voluntary
compliance' would not be written on any piece of paper, would have no legal
standing whatsoever and would not be policed by the Central Bank or anyone else. It
would be utterly unenforceable, did not include access to the FSO and would fall
entirely if the mortgage was sold on again.
The Minister for Finance has stated that no judge would grant an order for
repossession to an institution that had not followed the CCMA. However before a
case would get to that stage a borrower could face considerable stress and anxiety.
Applying the Code is not something that should happen at the end of the process but
instead it should happen at every stage.
Need to retain protection for those in arrears
Mortgage contracts are structured in a manner that is heavily weighted in favour of
the lender. Borrowers have little choice but to accept the standard contract that is put
in front of them.
The important point to note is that, when these mortgages were originally issued, it
could only be done by a regulated entity. Therefore it is logical that, if they are being
sold on, the entity that is purchasing them should be required to abide by the CCMA
in dealing with customers and those borrowers should also retain the right to access
the Office of the Financial Services Ombudsman.
To deal with this issue in a comprehensive rather than a case by case manner we
agree that the ownership of credit should be a regulated activity and those that
purchase all or part of mortgage book from a regulated entity should be required to
receive authorisation from the Central Bank.
Third parties who purchase mortgages should, by virtue of the Central Bank
authorisation process, become subject to the Code of Conduct on Mortgage Arrears
and customers should be eligible to take cases to the Financial Services
Ombudsman.
For any existing customers who have lost the protection of the CCMA by virtue of
their loan being sold and where they believe that the purchasing entity has not
abided by the CCMA, the legislation should reflect the need to ensure that they too
have a mechanism to enforce their consumer rights

Third Party Administrators
In many instances a purchaser of mortgages may not have the developed
infrastructure necessary to administer the loan book and instead appoint an agent to
carry out day to day work on their behalf. In these circumstances it is important that
the appointed agent has appropriately trained staff and clearly documented
procedures to deal with potentially complex arrears cases. Where decisions are
being taken to restructure loans, clear procedures must be drawn up between the
owner of the loans and the agent acting on their behalf to ensure that the customer is
treated fairly at all times.
Issues not covered by the CCMA
From a customer point of view there is potentially a significant difference between
their loan being owned by the originator and a third party investor. Banks which have
a continuing presence in the Irish market have an obvious interest in maintaining
their reputation and this places a constraint on how they otherwise may act.
On the other hand a third party purchaser of mortgages is primarily interested in
extracting the maximum value from those loans. There is a strong incentive for them
to increase the standard variable rate charged on the loan. The CCMA is likely to be
of little use to the customer in such circumstances.
While there is a general issue of consumer protection in relation to rising standard
variable mortgage rates, the issue is particularly acute in the case of customers
whose loans are owned by third parties as the reputational constraint which exists in
respect of mortgage originators does not apply. The Central Bank should carefully
address how this can be dealt with as part of the regulatory process to ensure that
customers whose loans are purchased are not the subject of unjustified rate
increases.