Changes to the personal insolvency legislation which removed banks’ ability to veto repayment solutions involving a person’s home were announced last May.
Less than three months earlier, however, Mr Noonan warned of the unintended consequences of adjusting existing legislation, adding that it would undo much of the progress made over the past number of years and risk having significant negative consequences for the economy as a whole.
In correspondence from Mr Noonan to Justice Minister Frances Fitzgerald in February 2015, seen by the Irish Examiner, the finance minister expressed concerns that fewer people might continue to make their mortgage repayments were the legislation to be changed.
It also appears that Government ministers felt banks may have been about to step up efforts to repossess people’s homes.
“I understand from discussions at the recent Cabinet Committee on mortgage arrears and the subsequent meeting with the Insolvency Service of Ireland and a number of Personal Insolvency Practitioners, active consideration is being given by your Department to adjustments to the personal insolvency legislation in anticipation of potential action by banks on repossession,” Mr Noonan wrote to Ms Fitzgerald.
“Any decisions from action in this area need to be carefully considered because of the risk of unintended consequences and a breakdown in general payment discipline.
“You will recall that arrears levels climbed dramatically through 2010 to 2013 at a time when there was much discussion on the possible construct of the revised personal insolvency framework where speculation was rife that some form of debt forgiveness may be on offer. Payment discipline suffered and the banking system struggled to deal with the growth of numbers in arrears…
“The consequences of publicly proposing changes to the legislation will lead to expectations of debt forgiveness and a reversal in much of the difficult work that has been undertaken in this area over recent years.”
Mr Noonan also had harsh words for his Fine Gael colleague and her department, which he claimed had not met its deadline for reviewing the existing legislation, adding that a preliminary analysis did “not contain the type of impact assessment necessary to guide decisions on proposed legislative changes”.
“At this stage of the economic cycle, proposing changes to the regime without sufficient analysis of the issues risks a real breakdown of payment discipline with significant negative consequences for the financial system and the economy,” he warned.
The Insolvency Service of Ireland said last month that the removal of the bank veto has already seen financial institutions reversing some of their decisions to reject proposed payment solutions.
The measures have faced criticism from opposition parties, however, who claim that the veto still exists due to some of the limitations of the legislation.
“To date, only a handful of cases have had the opportunity to benefit from the insolvency act that was passed last year,” said Fianna Fáil finance spokesman Michael McGrath.