Vulture fund interest rates may be unenforceable, says former High Court master

Some mortgages bought by vulture funds cannot arbitrarily have their rates increased as to do so would be contrary to the 1993 EU Directive on Unfair Terms in Consumer Contracts, says Edmund Honohan. Picture: Denis Minihane

A former master of the High Court has said he believes the imposition of heavy interest rates by some vulture funds on already distressed mortgages may be contrary to EU law and thus “unenforceable”.

Edmund Honohan, a Dublin barrister who served as master from 2001 to 2022, said that in his opinion some mortgages bought over by vulture funds cannot arbitrarily have their rates increased as to do so would be contrary to the 1993 EU Directive on Unfair Terms in Consumer Contracts.

The directive specifies that the cost of a service should be dictated at the time the contract is entered into only, said Mr Honohan.

Many Irish mortgage holders whose loans were bought out by the so-called vulture funds, including some which were not in distress and which had been performing, subsequently saw the rates they were paying effectively doubling to in excess of 8% in tandem with a historic series of base rate rises by the European Central Bank (ECB).

The ECB has hiked its key base rate 10 times since July last year, from 0% up to 4.5%, in an attempt to quell persistent inflation seen globally since the end of the covid pandemic.

Mr Honohan said that, having studied mortgage contracts offered by Ireland’s lenders, he is of the opinion that mortgage holders have two arguments against rate increases — the first that they should only pay the rate they would have paid to their bank and the second that a contract for service should not change even if the service is sold to another vendor.

He said when discussing interest rate variance, those contracts “insofar as they refer to anything at all, it is to the cost of funds”.

Cost of funds is dictated by money markets and combines with a bank’s margin to give an overall rate.

However, many vulture funds are backed by private investment and are not dependent on the money markets. Hence, they should not use those markets to dictate their rates, said Mr Honohan.

Courts never get to hear these cases because no one ever disputes them. People tend to throw in the towel.” 

He acknowledged that lengthy court cases do not tend to be in a debtor’s interests, but said there is “nothing to stop” a lot of such cases being taken as one by a single representative.

He said that the Supreme Court has indicated “they would like to hear” a case based on interest rate issues in order to tease out the law and are “on the lookout” for such a case.

“When the law changes who tells the judges?” he asked. “The debtors don’t know, and it isn’t in creditors’ interests to do so.”