Outcome of Central Bank's Multiple Debt Framework Pilot published

[Brendan Burgess]

Press Release - 4 April 2014 The Central Bank of Ireland today (4 April 2014) published the outcomes of the Multiple Debt Framework Pilot[broken link removed].

In May 2013 the Central Bank facilitated the ‘Framework for a Pilot Approach to the Co-ordinated Resolution of Multiple Debts owed by a Distressed Borrower’[broken link removed].

Participating lenders in the pilot included banks, credit unions and a credit card company. The pilot was operated by StepChange Debt Charity with cases referred from a range of lenders. As part of the pilot 1,338 cases were identified by lenders as potential cases meeting the selection criteria. Ultimately, due to exclusion criteria and other issues 282 borrowers were referred to StepChange for assessment. The results show that 144 out of 282 distressed borrowers received proposed solutions to their overall debt situation during the four month pilot. The key findings of the pilot are: * Borrowers, who had previously been reluctant to trust their lender, were found to be willing to find solutions through an independent third party working on their behalf, using an agreed framework. * The feedback from participating borrowers and lenders regarding StepChange, and their role as an independent intermediary, was extremely positive, in particular their professionalism and ethos of working in the best interests of borrowers. * Lenders are more inclined to agree an overall solution for a borrower when they have full view of the borrower’s financial situation and have sight of all solutions offered to all of the borrower’s other lenders. * The initiative demonstrated the advantage of not placing a borrower in the middle of conflicts with multiple lenders, with associated potential for conflicting advice. * A significant number of cases assessed during the pilot involved borrowers already living below accepted standard of living norms. This initiative provided these borrowers with an alternative solution to their overall debt situation without requiring bankruptcy. * Despite the economic incentives that exist for creditors to work together to the benefit of themselves and their mutual customer many appear to continue to prefer to work individually or to rely on formal legal processes. Central Bank Director Fiona Muldoon said, ‘The Central Bank facilitated this pilot to test the viability of the initial proposed approach agreed amongst the participants. I would like to sincerely thank all involved in the pilot for their constructive participation in an un-tested new process. We started this work in order to determine whether it was possible to achieve workable sustainable outcomes between multi-debted borrowers and their lenders by mutual consent. The pilot was a difficult but useful undertaking and we believe it highlighted the positive outcomes that are possible when creditors work together to help their mutual customer. However it has also demonstrated again the many potential barriers to resolution of individual debtor cases. I believe the outcomes from the pilot establish a foundation from which to develop a debtor led process that could achieve sustainable and fair outcomes without the need for the borrower to always enter the full insolvency process or bankruptcy should they chose not to. The Central Bank will continue to be supportive of any such initiatives for over-indebted consumers.’

 

[Brendan Burgess]

Original sample|1,338
603 Credit Unions refusing to participate|735
453 of these borrowers declined to participate|282
74 didn't meet the criteria or not contactable|208
16 more borrowers declined after intro call| 192
23 more dropped out as not prepared ot adjust living expenses|169
25 more borrowers did not like the proposed outcome|144

 

[Brendan Burgess]

. Borrower reasons for declining participation included:

[FONT=&quot]o [/FONT]The borrower had not heard of the pilot or of StepChange, and did not fully understand how the pilot could help their situation;

[FONT=&quot]o [/FONT]The borrower had made several efforts to resolve their situation with their lender which were unsuccessful and did not see the merit in trying again;

[FONT=&quot]o [/FONT]The borrower was already engaged with another third party and did not want to complicate their situation by engaging with another party;

[FONT=&quot]o [/FONT]The borrower felt that their position may improve and that they would be able to return to making contractual payments shortly; and

[FONT=&quot]o [/FONT]As stated in section 4.1, a number of borrowers who initially agreed to participate in the pilot, failed to return the written consent form to progress. A further small proportion of borrowers dropped out of the process at later stages.

 

[Brendan Burgess]

It was a huge mistake to use a UK body as an intermediary. MABS would have been far more successful.

[FONT=&quot]The pilot was launched with minimal publicity. One of the reasons for this was that the cases assessed during the pilot were referred by the lenders rather than directly led by the borrower. While well known in the UK, StepChange is new to the Irish market and borrowers were unaware of the charity’s work in the UK.[/FONT]

MABS were selected as the intermediary, but some dispute arose afterwards where some of the lenders appear to have changed the terms and conditions according to the MABS [broken link removed]at the time

MABS, the Money Advice and Budgeting Service, was surprised at media reports of their withdrawal from the Central Bank initiative on support to distressed borrowers with multiple debts.
...
MABS were willing to accept the associated terms and conditions as presented however, on further engagement with panel members, it became apparent that the proposed approach was not acceptable to certain lenders.

 

[Brendan Burgess]

Lessons Learned:

·[FONT=&quot] [/FONT]Steps C-G did not prove to be as effective at resolving cases as envisioned. It is apparent that many distressed cases have already received some type of forbearance and thus have either already had the terms of their loans extended and/or interest rates reduced. Thus an effective model needs to go further to provide effective relief for borrowers.

·[FONT=&quot] [/FONT]The waterfall approach was too rigid and did not allow flexibility when dealing with cases, in particular where improvements in borrower circumstances were expected in the sort and medium term. StepChange advised that a more rounded debt advice model (similar to the charity’s own UK model but tailored to the Irish market) would be more effective.

 

[Brendan Burgess]

Most significantly, the pilot demonstrated that the waterfall approach trialled during the pilot was not a fully effective approach to debt resolution. The prescriptive nature of the waterfall model was not flexible enough to deal with the varying nature of multi-debted cases and in some circumstances did not provide sufficient flexibility to allow the case to be resolved in the most effective manner. During the discussions, StepChange advocated that a more flexible, principles-based debt advice model with the needs of the borrower at its heart would be more suitable.