Consumer bill may fall short in protecting against ‘vulture funds’

The Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015 has moved into the final stages of its Dáil review and the Central Bank has started casting its regulatory net to see who will become regulated under the bill.

It is writing to persons and businesses who have purchased loans from Nama or others, to start a dialogue that might lead to them being regulated.

The bill is, 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 (IBRC).

One of the concerns raised was that borrowers, as a result of the sale of their loans by regulated lenders to vulture funds, would lose the protection of the Central Bank’s various codes of conduct and that those vulture funds would treat mortgage holders and some other borrowers unfairly in an attempt to squeeze extra returns from their loan portfolios.

The original proposal to purchasers of loans — the owners of credit— has changed focus as it went through our legislative process so the bill will regulate the servicers of credit rather than the owners of the credit creating a new category of regulated business in Ireland – that of “credit servicing”.

Most of the purchasers of mortgage loans are unlikely to possess the administrative capability necessary to deal with portfolios of thousands of mortgage loans. To manage their investments 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. It makes sense that any entity that acts as a credit servicer should be regulated by the Central Bank. The activity of credit servicing encompasses a broad range of administrative functions, including managing or administrating repayments and issuing statements.

But it specifically does not include the following: determining the overall strategy for the management and administration of a portfolio of loans; credit agreements; making key portfolio decisions; and engaging a credit servicer or enforcing a loan.

The exclusion of these main discretions seems reasonable for credit servicers. They are not the core activities of credit servicing firms. However, it is surprising that the principal areas of discretion relating to the management of loans – which if abused would be prejudicial to borrowers – are excluded from regulation.

The only regulation regarding the management of loans is an attempt to indirectly regulate by making the exclusions conditional on being carried out in a manner in accordance with financial services legislation, including the Central Bank statutory codes of conduct. While this is an attempt to give consumers some kind of recourse against the holder of a loan book, it does not seem much of an improvement.

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.

The bill shows Ireland has not learned from the UK where the activity of administering mortgage contracts has been subject to regulation since 2001. However, the HM Treasury has recognised the new regulatory gap that occurs when mortgages are sold on.

In a consultation paper, the HM Treasury consultation paper 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 that there is a weakness in the UK regulation, specifically that regulation of a credit servicing firm alone may not be sufficient protection for consumers.

In deciding that the bill will regulate loan servicers but not loan purchasers, it could be said that Ireland is leaving itself open the same regulatory gap that exists in the UK. Despite any perceived shortcomings of the bill, it is a substantial regulatory development and is expected to pass through the Houses of the Oireachtas soon.

If the bill is enacted, firms that carry out credit servicing will be required to be authorised by the Central Bank within three months of the enactment. Such firms will also be subject to a transitional period prior to authorisation where the Central Bank may impose regulatory and supervisory conditions on such firms.

For more information, contact Trevor Dolan at LK Shields www.lkshields.ie