Debt Negotiations
Loan arrears and the benefit of
early and appropriate engagement
with banks
Paul Kerr
28
th
April 2014
First Choice Financial Service Ltd
www.firstchoiceltd.ie
•
Lender with over 20 years experience – worked with AIB,
National Irish Bank and Bank of Scotland (Ireland)
•
Senior Credit Reviewer with the government Credit Review
Office overviewing declined business lending decisions in
both AIB & Bank of Ireland
•
External credit assessor (loan approver) for the government
backed Microfinance Ireland – approving loans of up to
€25,000 to SME’s
•
Banking & debt consultant with First Choice Financial
Services in Limerick for over 4 years
•
Authorised by the Central Bank of Ireland to provide debt
management services to consumers
Two types:
(1)
Consumers
(2)
Non-Consumers
Legislation to
protect
Consumers
1. Code of Conduct on
Mortgage Arrears 2013
2. Consumer Protection
Code 2012
Code of Conduct on
Mortgage Arrears 2013
• The CCMA requires mortgage lenders to adopt specific procedures when dealing with borrowers experiencing arrears and financial
difficulties. Such procedures must be aimed at helping you as far as possible in your own particular circumstances
• In general, the CCMA requires lenders to wait 8 months before taking legal action about mortgages in arrears. However, this requirement does not apply if a borrower is deliberately not co-operating with the lender
• Regardless of how long it takes your lender to assess your case, and provided that you are co-operating, you must be given 3
months’ notice before they can commence legal proceedings where either:
– Your lender does not offer you an alternative repayment arrangement for your mortgage
– You do not accept an alternative repayment arrangement offered to you
• This will give you time to consider other options, such as voluntary surrender, voluntary sale, split mortgage or a Personal Insolvency Arrangement.
MARP
• The Mortgage Arrears Resolution Process (MARP), laid out in
Provision 18 of the CCMA, is a process whereby lenders and
borrowers are expected to work together to come to an
alternative payment arrangement when a borrower is in
default of his/her mortgage repayment and has accrued
arrears.
• The MARP applies in three instances:
– when a borrower is in pre-arrears,
– already in arrears or
– when an existing alternative payment arrangement breaks
down.
• Its aim is to provide an alternative solution to the lenders
enforcing their security through taking possession of the
property and subsequently selling it.
There are four stages to the MARP: Communication, Financial Information, Assessment and Resolution.
• Once a borrower finds himself or herself in arrears with his/her mortgage
payments the MARP process will begin by the lender communicating with the borrower about this.
• The lender will ask the borrower to complete a Standard Financial Statement (SFS) form outlining the borrower’s financial position (average income and expenditure).
• The lender’s Arrears Support Unit (ASU) will assess the SFS provided by the borrower and on that basis determine whether an alternative payment
arrangement may be entered into and if so, what form of alternative payment arrangement is best suited to the borrower’s particular circumstances. The ASU must assess the SFS in a timely manner and each case on its individual merits. • Once a suitable alternative payment arrangement has been decided on the
basis of the assessment this arrangement will be put in place. Any legal proceedings for possession will be put on hold while the terms of this arrangement are respected.
• There is also an appeals process for borrowers to appeal decisions of the
lender; however, under the new CCMA this is not included as part of the MARP.
The MARP does not apply in the following circumstances:
• The borrower is deemed no co-operative.
• The MARP comes to an end, for example if an agreed
alternative payment is no longer possible.
Once the MARP no longer applies this allows the lender to
commence legal proceedings to recover possession of the
mortgaged property. This can be either three months from the
borrowers exiting from the MARP, or eight months from the date
the arrears rose, whichever is later.
Not co-operating
The revised CCMA expands the definition of ‘not co-operating’ with the lender. You may be classified as not co-operating if you:
• Do not fully and honestly disclose significant information or • Fail to provide relevant information within a reasonable time or • Are in arrears for three months, during which you either failed to
contact the lender or respond to its communications, or your response is insufficient for a complete assessment of your circumstances or
• Have entered an alternative repayment arrangement and three months have passed, during which you have not fully made the alternative repayments or
• Have not entered an alternative repayment arrangement and three months have passed, during which you have not fully paid your mortgage or have not cleared your arrears
Not co-operating cont.
• Before classifying you as not co-operating, the lender must write to you, giving you 20 business days to take specific actions to enable it to assess your circumstances. It must warn you about the
implications of not co-operating and suggest that you seek
appropriate advice. It must also highlight the position about debt outstanding after repossession or sale.
• If you are classified as not co-operating, you lose the protections of the MARP and your lender may commence legal proceedings
immediately.
Resolution
• You may appeal the decision to classify you as not co-operating • Complaints procedure
• Financial services ombudsman
There is a relationship between the MARP and the 2012
Personal Insolvency Act.
In order to be eligible to apply for a Personal
Insolvency Arrangement (PIA), the borrower must have
been considered to be co-operating, and have
participated in the MARP for a minimum of 6 months.
Consumer Protection
Code 2012
The Code includes requirements setting out how regulated
entities must deal with and treat consumers who are in
arrears on a range of loans including credit cards, personal
loans and buy-to-let mortgages.
It does not apply to mortgages on a primary residence
• these are covered by the Code of Conduct on
Mortgage Arrears, described previously.
The Consumer Protection Code requires lenders to seek to
agree an approach that will assist a consumer in dealing with an
arrears problem.
The Code also provides that the lender must:
• Have in place written procedures for handling arrears and
make information available to you to assist you in dealing with
arrears
• Where your account remains in arrears ten business days
after the arrears first arose, immediately contact you to find
out the reason for the arrears
• Ensure that the level of contact and communications from
them, or from any third party acting on their behalf, is
proportionate and not excessive.
Lenders must not:
• Initiate more than 3 unsolicited communications with you, by
whatever means, in a calendar month, other than
correspondence required by the CCMA or other regulatory
requirements. (This limit does not include missed calls or
engaged numbers.)
• The Consumer Protection Code 2012 replaces the original
Consumer Protection Code, which came into effect in 2007.
Resolution
• Complaints procedure
• Financial services ombudsman
Legislation to
protect
Non-Consumers
Code of Conduct for Business
Lending to Small and Medium
Enterprises 2012
This Code applies to all business lending by regulated entities.
This Code shall not apply to Credit Unions.
The Code’s objectives are:
• to facilitate access to credit for sustainable and productive
business propositions,
• to promote fairness and transparency in the treatment of SMEs
by regulated entities, and
• to ensure that when dealing with financial difficulties cases, the
aim of a regulated entity will be to assist borrowers to meet their
obligations, or otherwise deal with the situation in an orderly and
appropriate manner.
Code of Conduct for Business Lending
to Small and Medium Enterprises 2012
This Code applies to regulated entities when providing the following credit products within the State to SMEs operating within the State, unless
otherwise stated: • Overdrafts • Loans • Term loans • Leasing • hire purchase
• and invoice discounting but excluding:
• lending to other financial institutions,
• syndicated, club, or multi-lender transactions, and
• special purpose vehicles including vehicles established for the purposes of a particular transaction.
Code of Conduct for Business Lending
to Small and Medium Enterprises 2012
The Code recognises that for SMEs in financial difficulties, each SME
needs to be considered on a case by case basis. It also recognises that for SMEs at risk of going into arrears, it is important that the borrower contacts the regulated entity to inform them of the difficulties and engages with the regulated entity to try and address the situation
A regulated entity must ensure that in all its dealings with customers and within the context of its authorisation it:
1) acts honestly, fairly and professionally in the best interests of its customers and the integrity of the market;
2) acts with due skill, care and diligence in the best interests of its customers;
3) does not recklessly, negligently or deliberately mislead a customer as to the real or perceived advantages or disadvantages of any product or service;
Code of Conduct for Business Lending
to Small and Medium Enterprises 2012
4) has and employs effectively the resources, policies and procedures, systems and control checks, including compliance checks, and staff training that are necessary for compliance with this Code;
5) seeks from its customers information relevant to the product or service requested;
6) makes full disclosure of all relevant material information, including all charges, in a way that seeks to inform the customer;
7) seeks to avoid conflicts of interest;
8) corrects errors and handles complaints speedily, efficiently and fairly; 9) does not exert undue pressure or undue influence on a customer;
10) ensures that any outsourced activity complies with the requirements of this Code;
11) without prejudice to the pursuit of its legitimate commercial aims, does not, through its policies, procedures, or working practices, prevent
access to basic financial services; and
12) complies with the letter and spirit of this Code.
Code of Conduct for Business Lending
to Small and Medium Enterprises 2012
Microfinance Ireland
Microfinance Ireland provides loans to small businesses with no more than 10 employees, including sole traders and start-ups. The loans of between €2,000 and €25,000 are for commercially viable proposals that have been refused credit by the banks.
• Details of how to apply and forms are available on www.microfinanceireland.ie
Credit Review Office
If you have a small or medium business and your application for credit is refused by one of the participating banks you may apply to the Credit
Review Office to have your case reviewed. To be eligible for a review your application must have been in writing. There is a bank lending application form on the website of the Credit Review Office. The fee for the review ranges from €100 up to a maximum of €250.
• Details of how to apply and forms are available on www.creditreview.ie
The Credit Guarantee Scheme (as currently structured)
The Credit Guarantee Scheme aims to encourage additional lending to small and medium businesses who are commercially viable but have
difficulty in accessing credit. Under the Scheme eligible applicants will be assisted in obtaining a loan and in establishing a favourable credit history. The Credit Guarantee Scheme provides Bank of Ireland and other lenders with a State Guarantee, covering eligible credit facilities for 75% of the
facility value, over a three-year period. The customer is required to pay a premium of 2% per annum, to the Government, on receipt of eligible
facilities.
Guide to assist
Many small businesses have difficulty getting credit. ”Your Business Your
Bank” (Google it!) is a guide on getting funding for small and medium
businesses. It includes information on how to prepare a bank credit application.
Debt Management
Services Authorisation
NEW LEGISLATION
New regulations:
Part V of the Central Bank Act 1997 (the “Act”) has been
amended by Part 10 of the 2013 Act to provide for a
regulatory regime in respect of debt management firms.
The Central Bank is responsible for the authorisation and
supervision of debt management firms under Part V of the
Act.
Section 28 of the Act defines a Debt Management Firm
as meaning:
A person who for remuneration provides debt
management services to one or more consumers, other
than an excepted person.
The Act defines Debt Management Service as meaning:
a) giving advice about the discharge of debts (in whole
or in part), including advice about budgeting in
connection with the discharge of debts,
b) negotiating with a person’s creditors for the
discharge of the person’s debts (in whole or in part),
or
c) any similar activity associated with the discharge of
debts;
Consumer means:
For the purposes of Part V means:
a) an individual acting otherwise than in the course of
business, or
b) A micro enterprise within the meaning given by
Commission Recommendation 2003/361/EC of 6 May
2003 concerning the definition of micro, small and
medium sized enterprises
Proposed Authorisation Requirements and Standards
for Debt Management Firms
Following the commencement of the 2013 Act, a person
shall not carry on the business of a debt management firm
unless the person is the holder of an authorisation or is an
excepted person under the Act. Each applicant must:
• comply with the Central Bank’s Authorisation
Requirements and Standards; and
• comply with the conditions of authorisation that will be
imposed by the Central Bank on granting an
authorisation.
Fitness and probity standards (minimum competency)
Addendum to Minimum Competency Code 2011
• The following text was recently added to Section 1.5 of the MCC:
“The grandfathering arrangements do not apply to persons when providing debt management services”
• QFA is not an accepted qualification either to provide debt management advice
Transitional Arrangement
A person performing the specified function of providing debt management services on 1 August 2013 who does not hold a
recognised qualification in respect of that specified function may, until 1 August 2017, perform the specified function of providing debt
management services as if that person were a qualified person.
Debt Management Services Authorisation
Required Qualification
Providing debt management services, as defined in Part V of the
Central Bank Act 1997:
• Accredited Product Adviser (Debt Management Services)
(Institute of Banking School of Professional Finance, LIA and
The Insurance Institute of Ireland)
OR
• Accredited Product Professional (Debt Management Services)
• Providing Debt Management Services without Central Bank
Approval will result in a significant fine and/or a term in prison
• There are only 13 firms in the country (as of 8
thApril 2013)
currently authorised to provide Debt Management Services to
consumers
• A large number of Personal insolvency practitioners (PIPs)
cannot provide informal debt advice, they can only offer
advice within the scope of the Personal Insolvency Legislation
• PIPs are regulated by the Insolvency Service of Ireland but
are not regulated to hammer out informal arrangements with
banks
Information requirements for regulated firms when
engaging with consumers:
• Signed Terms of Engagement
• Terms of Business to be provided
• Letter of Authority signed to engage with Banks
• Signed and completed Standard Financial Statement
(Acts as a “Fact find”)
• ID and address verification for Anti-Money Laundering
purposed
• Reasons why / Statement of suitability to be given to
consumer
Issues:
• Long and protracted application process
• Slows down engagement process, due to necessary
steps now required to be compliant
• Banks only now becoming aware of the authorisation
requirements and may be either passive, or restrictive in
engagement with advisors
• Significant insurance and operational structure
requirements
Benefits:
• Will set professional firms apart from the rest
Engaging with Banks
How we engage with Banks
Initial Step
•
Take on client following previous steps outlined
•
Issue a LOA with a holding letter giving 15-30 days to respond
with a proposal on behalf of the client
•
Issue a Data Access Request (if necessary) which can take up to
40 working days
Steps with Clients in the interim
•
Clarifying the liability
•
Understanding the issues
•
Identifying possible solutions “the process”
Final Steps
•
Develop and implement an action plan
Documentation review
• Loan agreements • Bank letters
Strategic review (Statement of Suitability/Reasons Why)
• Secured assets & other assets
• Devising an acceptable plan (short / medium / long term)
Implementation
• Engagement with the Bank
Negotiation
• Achieving realistic outcomes
Output / result
• Managing expectations for all parties
Debt Negotiations
•
Validate and prepare ‘evidence backed’ proposals
•
Make the bankers job easier
•
Formulate a plan that is a ‘win win’ for both the client
and the Bank
•
Avoid legal action and/or insolvency as a solution
Funding requests to assist refinance or other
•
Standardised format / Professional
•
The financial broker / agent will be dealing with banks &
people whom we know and regularly send business to –
mutual trust
•
They can complete multi-applications at the same time
& get you the best funding package
•
It’s quick, convenient, to the point - less stress involved!
Consumers &
Non-Consumers
• Failure to respond acknowledging Letter of Authority (LOA)
• Continued direct engagement with clients and not nominated third parties:
– Under the Consumer Protection Code 2012, section 8.5 – “at the
personal consumer’s request and with the personal consumer’s written consent, a regulated entity must liaise with a third party nominated by the personal consumer to act on his or her behalf, in relation to arrears”
• Poor internal management systems
– make sure you know the date when you sent a LOA and the location (page number) in any pack you send. One particular Bank bulk scans information and can take 5-10 minutes on occasion to locate the LOA on file in order to engage
• Failure to respond to complaints in a timely and professional manner • Generic responses to clients which can cause confusion
• Continued standard arrears letters which cause panic and concern for clients even though they have a nominated 3rd party
• Bank policy – ‘Kick the can down the road’ approach at times
• Genuine arrears and hardships of clients – Banks at times do not care and see each clients as a number
• Banks policy beginning to change allowing for ‘deals’ to
happen
• Banks now more versed with the CCMA (consumers
only) and CPC and are offering more suitable
alternatives than ‘interest only’ agreements
• Opportunities with non-Irish banks accelerating their exit
allowing better ‘deals’ including write downs to happen
e.g. Bank of Scotland
Case Studies
Bank loan € 1,500,000
Bank security € 250,000
€ 1,250,000
Issues:
4 * negative equity loans Negative net worth
Elderly borrower; no income but some assets (cash, shares and property)
Bank willing to engage but took over 2 years to reach agreement
Outcome
Asset disposal & settlement terms. Borrower kept their home and half of their assets with the balance to settle the liability. Full and final
settlement agreed with €1m write-off of debt
Bank loan € 750,000
Bank security € 250,000
€ 500,000
Issues:
2 * negative equity loans
Borrowers not talking, partnership dissolved. Both borrowers in negative net worth & our client with limited income
Outcome
Bank asset disposal & settlement
Our client offered €50k (the equity in his home) repayable over 5 years in full and final settlement of his residual debt. Deal done.
Case 3 – Commercial (Write-down)
Bank A loan €1,257,000
Bank A security € 250,000
€1,007,000
Issues:
• Personal debt & business premises used to operated their business from
• Negative equity loan being repaid on interest only • Negative net worth of borrower
• No ability to repay the loan as currently structured
Outcome
• Refinance of asset via existing Limited Company with Bank B for €280,000 (incl. €30k fixtures & fittings)
• Payment to Bank A of €310,000 (€30k residual payment by borrower & €280k from refinance)
Case 4 – Former PDH (Split Mortgage)
Bank loan € 216,000
Bank security € 110,000
€ 106,000
Issues:
• Negative equity loan on former family home • Negative net worth
• Renting property in new location and limited repayment capacity after rental income received for BTL
Outcome
• Split Mortgage achieved 57% / 43% (parked) – Bank would not split if parked balance above 50%
• Reduced interest rate and loan extended to retirement age to allow for repayment capacity of 57% of loan balance
Case 5 – Debt recovery firm
Bank loan € 220,000
Bank security € 90,000
€ 130,000
Issues:
• Negative equity loan on former family home • Joint borrower – both negative net worth
• Was paying net rent to bank (€500) on loan repayments which were meant to be €1,500 – loan was not sustainable
• Client breached loan conditions and was outside of MARP
Outcome
• Provided evidence of financial capacity of borrowers which was limited – agreed to avail of assisted voluntary sale (AVS)
